Can a mortgage company force a homeowner to buy insurance?
UPDATED: Oct 17, 2017
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Asked October 17, 2017
Any lending institution can set whatever requirements it deems appropriate within the letter of the law when loaning money. A mortgage company will do everything it must to protect itself in the event that you, the borrower, your guests or a natural or man-made event cause damage that can lower the value of the property. Mortgage companies require borrowers to maintain a certain minimum level of insurance coverage to protect their investment.
Some lenders allow you to shop for a plan while others set up insurance in your name and then add the premium payments to your mortgage payments. This latter force-placed insurance costs a lot more than if you set up coverage on your own. The best way to prevent this scenario is to discuss your insurance responsibilities with the lender at length before you sign any paperwork. You should also make certain that all documents clearly outline the exact level of insurance coverage that you must maintain during the term of the mortgage in the form of line-by-line statements of required covered areas. The reason that these details are necessary is prevent the lender from stating at some point in the future that you are not upholding your end of the deal through a third-party insurance carrier so that they can then force you into their preferred insurance carrier's plan.
If a mortgage company requires that you go with their preferred carrier and plan from the start, look for another lender: Some unscrupulous lenders attempt to force borrowers into insurance plans so that they can reap additional profits through subsidiary and partner insurer relationships. All mortgage companies require that you maintain special coverage in addition to a standard home insurance policy since they rarely care about liability or personal property coverage. That said, only lenders seeking to profit from insurance require force-placed insurance from the start. The only times a mortgage company should ever attempt to put you in a force-placed insurance plan is if you allow your third-party policy to lapse or fail to provide proof of coverage to the lender when requested in a timely fashion.
Answered October 18, 2017 by CarInsuranceCowboy