We have noticed a trend lately with more people allowing their home insurance to lapse when faced with financial hardship. It seems like a logical choice to make. If you are having a tough time putting food on the table then you need to cut costs somewhere – and a faceless insurance company seems like a good place to start. Where it gets complicated is that home insurance coverage is a requirement of most lending banks. If a homeowner cancels home insurance it is a default under the mortgage and the lender can then call the loan due. A foreclosure action then begins. The fact of the matter is that it is NEVER advisable to cancel your home insurance for any reason, and here is why:
- Cancelling your insurance can result in foreclosure
Most mortgages have a provision that requires the borrower to maintain adequate home insurance. Your home insurance not only protects your primary asset but it also protects the bank’s asset. When a bank lends you money in the form of a mortgage it is an asset to the bank. You pay them monthly for the right to use that money. Their asset must be protected. If your home burns down their asset (mortgage) is at risk of not being paid back unless there is adequate insurance protection in place. The primary reason they want you to have insurance is for their protection, not yours. You will find this requirement outlined in the fine print your original mortgage agreement.
- Makes it harder to work with the bank while in foreclosure.
If you are in foreclosure a cancellation of insurance makes it harder for you to work with the bank to correct the default. We often submit formal payment plans to lenders on behalf of clients in foreclosure. One of the key provisions within those plans is that the homeowner must prove they are current on their homeowner insurance policy. The bank will not even consider a payment plan if no insurance policy is in place.
- Opens you up to liability if there is an incident.
Without proper insurance, you have a higher risk of loss if something destructive occurs to the property, if someone is injured on the property, or any other type of incident happens to which you are liable for. Replacing a home due to a fire or, having to combat a lawsuit for personal liability can cost well into the hundreds of thousands of dollars. Having insurance is the most basic way to prevent a severe financial blow.
- It makes it VERY difficult for you to obtain insurance in the future.
This is probably the most important point that is overlooked by many homeowners. If you cancel your home insurance, have a lapse in payments, or have your insurance cancelled on you, it can be extremely difficult to obtain insurance from any insurer at a later date. Having a cancellation in your insurance history is black mark on your permanent record. Insurers see you as unreliable, and most will choose not to do business with you. A future insurer will see this lapse and inquire about the nature of the gap in insurance. The end result is your insurance premiums are likely to be much higher with the new insurer – if you can even find one. Any new insurer will also likely force you to pay up front for the entire year, as opposed to a monthly plan.
If you are considering canceling your home insurance to save money, DON’T DO IT! Find those savings elsewhere. If you have already made the mistake of dropping your insurance coverage, work as quickly as possible to get it back. If you need help navigating this process, or any other foreclosure-related issue, please contact us.
