Stay Insured
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Members' Homepage Obviously, you need to keep your insurance agent up to date on the value of the property to make sure you're covered. Insurance policies coverages are generally automatically adjusted annually to insure that they keep up with replacement costs.
Of even greater importance is keeping insurance coverage in place. If your insurance premium is not paid through an impound (escrow) account with your lender, be sure that you always pay your premium in a timely manner.
First, it doesn't look good on your loan record.
Second, failure to pay insurance (and property taxes) when due is usually a cause for a loan default. Even if the lender doesn't claim a default and/or commence foreclosure, the least that will happen is that the lender will provide replacement coverage. This is usually not of benefit to the owner for one or more of three reasons.
Third, the lender will not be concerned about the cost of the coverage. Many lenders have their in-house insurance divisions or are affiliated with an insurance company and will provide coverage through their own or affiliated company, often at a non-competitive premium.
Fourth, the lender will usually provide coverages only for the protection of the lender and not be concerned about the owner's risks. The lender is concerned only about covering losses to the amount of the loan. For example, assume that you purchase a property several years ago for the price of $600,000 with a loan of $400,000. Also, assume that the property is currently insured for $750,000, based on your insurance companies estimate of replacement value. If the lender provides a replacement policy, it will likely provide for only $400,000 of hazard coverage (perhaps less because of principal pay-down). If the property were to now be completely destroyed, the lender would receive $400,000 and you would be left with a property having a value equal to the land value less the significant cost of demolition and removal of debris. This value will likely be substantially less than the $350,000 equity you once had.
Special coverages such as earthquake or flood insurance that you consider important to your risk tolerance may not be considered to be important by the lender or may simple not be thought about period.
Also, the policy may not provide various liability coverages that an owner will be concerned about. The lender is not at risk for liabilities such as injury or fair housing violations because the loan is a lien that will be ahead of any lien resulting from a lawsuit. Accordingly, you can be completely open to a number of possible risks.
Finally, whether the lender replaces your insurance with a policy that leaves you under insured or, even worse, you end up with no insurance at all, there is something that you must keep in mind. The lender usually still has you as borrower on the hook for any insurance deficiency. Unless the property is of a limited type that your state might eliminate by law from deficiency judgments, you will remain personally liable after a major loss for any part of the loan not covered by insurance. Many states do not have anti-deficiency laws at all and those that do usually limit the type of properties covered to single-family or duplex properties.
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