Homeowners insurance is one of the peripheral issues that families facing foreclosure must deal with. While it is possible that the county can take the home through a different type of foreclosure for unpaid property taxes, and the mortgage company will be pursuing a lawsuit for the defaulted mortgage contract, there is little the homeowners insurance company will do upon nonpayment. However, this does not mean that property owners have nothing to worry about.
There are two most likely scenarios when homeowners begin missing their mortgage payments, and what happens with the insurance will relate to how the premiums are paid. The issue may be handled differently depending on if the owners pay the insurance on their own or if it is paid monthly through the escrow on the mortgage. Most homeowners, though, escrow their property taxes and homeowners insurance through their monthly mortgage payment.
Typically, when payments are missed on an insurance policy, the coverage will continue for a period of months. If something happens to the house, the owners will be covered by their policy, although the amount they have fallen behind will be deducted from total awarded to them for the accident. However, if numerous payments are missed for longer than just a few months, the policy will lapse and the owners will no longer have any coverage.
When the policy has lapsed, the owners will no longer be covered under any of the provisions. This means that, if anything happens to the house, the insurance company will have no responsibility to make a payout to the owners since the insurance was not kept up. A small but growing number of homeowners have actually burned down their homes in foreclosure to attempt to collect the insurance money, but this is not advisable if the premiums are not paid up and is fraudulent in any case.
What may happen at this point, though, is the mortgage company will buy its own homeowners insurance for the house, and they will add the monthly premiums to the amount owed on the loan. If the homeowners want to get back on track with the mortgage, they will have to pay back this extra amount for the forced insurance. Lenders will also not shop around for the best rates, so the monthly cost for the policy may be quite a bit more expensive than the owners were used to.
Simply missing payments on the insurance policy, though, will not create any other liability for the homeowners later on. The insurance company will discontinue coverage for any damage to the property, but there is no danger it will sue the owners for any deficiency judgment or other lawsuit related to the lapsed policy. Thankfully, in this instance, unlike the mortgage or property tax payments, homeowners do not have to worry about being sued again and having to deal with more liens or collection agencies.
Of course, this should not be an issue at all if the homeowners pay the insurance through their monthly payment to the lender. The bank will keep paying the taxes and insurance to make sure the policy does not lapse, while adding the amount of these missed payments to the total needed to reinstate the loan. Any insurance payments the lender makes will be included in the payoff and foreclosure judgment.
Thus, homeowners facing foreclosure should keep in mind that their property insurance will still need to be paid if they wish to keep coverage in case of fire, natural disaster, or other accident. While their bank may place forced insurance in the case of a policy lapse, the rates are often very high, but the owners will have to pay back any premiums made on this policy to the lender to stop foreclosure. Keeping the insurance policy current on a house, while it is somewhat less important than saving the home to begin with, is one more issue homeowners in foreclosure need to keep in mind.
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