When you purchase a home, your lender will require that you purchase homeowner's insurance. This type of insurance is designed to protect you and the lender against catastrophes that can cause damage to a home, such as a fire. If you fail to get or keep your homeowners policy, you should not be surprised if your lender purchases a policy for you. Here are several things to understand about lender-purchased homeowner's insurance policies.
Why Lenders Purchase Insurance
When you owe money on your home, the lender is the primary lienholder on the property. Your lender is relying on collecting this money. If your home is completely destroyed by a fire, the lender will receive the money you owe on the house from the insurance company that provides the coverage.
If you did not have insurance on the house and it was destroyed by a fire, would you have the ability to repay the loan on the home? Probably not, and this is why your lender will require homeowner's insurance on your house if you have a loan.
When a homeowner fails to get coverage or allows the policy to lapse, the lender will protect itself by purchasing a policy for the house. This type of policy is called a lender-based insurance policy, or force-based insurance. When you buy the house and take the loan, you will be required to list the name of the insurance company that is providing you the home insurance coverage. In addition, you will most likely need to supply the policy number and the phone number of the insurance company.
If your policy lapses, your insurance company will notify any lienholders on the property, and this includes your mortgage company. When they receive this notification from your insurance company, they will immediately purchase a home insurance policy for your home.
What Lender-Based Policies Are Like
There are several reasons you should avoid allowing this to happen. The first reason is because the policy the insurance company provides will not offer any protection for you. It will be designed to cover the house for the balance you owe on it, but it will not cover anything else. You will not get any money from the insurance company if the house is destroyed, and it will not cover your personal belongings. This type of insurance is only designed to protect your lender.
In addition, the policy might be more expensive than your normal policy, and you will have to pay it. Your insurance company may notify you and give you a chance to purchase your own policy. If you fail to, they will purchase this type and bill you for the premiums, and you will have to pay these premiums.
Ways To Avoid This
Keeping home insurance on your home is important for your future, and finding a way to avoid lender-placed insurance is vital. The only way you can do this is by making sure you pay your premiums on your home insurance policy.
If your policy lapses because you cannot afford it, you may want to shop around for quotes on homeowner's insurance. Another option is to talk to your lender about setting up an escrow account to pay the insurance. With this option, you will be able to pay monthly payments towards your homeowner's insurance, and this might be more affordable for you.
Homeowner's insurance is important for anyone that owns a home, even for people that do not owe money on their homes. If you would like to find a more affordable policy for your home, contact a company that offers homeowner's insurance and ask for a quote.