Home insurance not only provides financial protection in the event of a disaster, but it is often required by mortgage lenders as a condition of the mortgage. In most cases, a mortgage lender will request proof of home insurance prior to funding your mortgage, along with the lender being named on your home insurance policy as a beneficiary in case of a loss. However, what happens to your mortgage if your home insurance gets cancelled, or you cancel it, and your mortgage lender finds out?
Beyond the common benefits of having home insurance and the potential risks of not being covered in case of a loss, there are potential consequences if your lender discovers that you do not have adequate coverage.
What Happens if Your Home Insurance Gets Cancelled or You Cancel It?
If your home insurance policy is cancelled, or you cancel it, you are no longer protected against loss or damage to your home or personal property. This can be a significant risk for homeowners, as the costs of repairing or replacing a home can be enormous. Without insurance, homeowners could be left with no financial assistance to rebuild or repair their home and may be forced to pay for these expenses out of pocket.
What Happens to my Mortgage if my Insurance is Cancelled?
If you have a mortgage registered on your property, your lender will typically require you to maintain adequate insurance coverage on the property. The simple reason for this is if your property sustains damages, your mortgage lender wants to ensure their "collateral" (which is your property), is adequately protected. If a homeowner fails to maintain the required coverage, they are introducing risk to the lender that may be in breach of the terms of the mortgage. This could put their mortgage in jeopardy. In some cases, the lender may even have the right to foreclose on the property if they discover that the homeowner does not have insurance.
What Happens if Your Lender Discovers That You Do Not Have Adequate Coverage?
Most mortgage lenders will conduct periodic audits of their borrower's insurance coverage. They can do so by either asking the borrower to provide proof of coverage from the insurance company, or in cases, by subscribing to databases that notify them about potential risks to properties in their mortgage portfolio. If your lender discovers that you do not have adequate insurance coverage on your property, they may take action to protect their interests. The specific actions that a lender may take will depend on the terms of the loan, the lender's policies, and your mortgage terms and conditions.
Here are a few potential scenarios:
Penalties or Fines: Some mortgage lenders may impose penalties or fines on homeowners who do not maintain adequate insurance coverage. These penalties may be a flat fee or a percentage of the outstanding loan balance.
Recall the Mortgage: In some cases, a lender may even have the right to recall the mortgage, meaning you'd have to pay all of it back at once. If you cannot pay it, the lender may even have to resort to foreclose or forcing a power of sale on the property. This is a drastic measure that is typically reserved for cases where the homeowner has repeatedly failed to maintain adequate insurance coverage.
The Bottom Line
In conclusion, homeowners should be aware of the consequences of not having home insurance and should take steps to maintain adequate coverage on their property. If a homeowner's insurance is cancelled, or they cancel it, they should take immediate steps to obtain new coverage to avoid any potential repercussions with their mortgage lender. It is always better to be proactive and protect your home and investment.