Most homeowners know that if they don’t make their mortgage payments, they could lose their home to foreclosure. But not everyone knows that if you default on the deal in some other way, like by not keeping your homeowners’ insurance current, you might face foreclosure as well.
Defaulting on a mortgage loan means failing to keep the promises you made by signing the promissory note and mortgage contract. Most notably, if you fall behind in payments, you’re in default.
But if you fail to comply with the other terms of the loan contract, you’re also considered in default. The most common causes of default—other than nonpayment—are:
(Learn more about what it means to default on a mortgage loan and the consequences of default.)
If your loan servicer doesn’t collect money from you to pay the homeowners’ insurance through escrow, you must find and pay for this insurance on your own, separate from the mortgage payments. If you fail to obtain or maintain insurance coverage, in most cases, you’ll be in violation of the loan contract.
The servicer may then purchase insurance at your expense. This kind of insurance is called “force-placed” or “lender-placed” insurance. The cost of the force-placed insurance is then added to your mortgage debt, and you'll have to repay it—and it’s usually expensive. (To learn more about force-placed insurance, including what sort of notice you’ll get before the servicer buys this type of insurance for you, see What Is Force-Placed Insurance?)
When you don’t repay the amounts that the servicer advanced for force-placed insurance, this failure usually constitutes a default under the terms of the mortgage agreement. The lender can then “accelerate” the debt (demand immediate repayment of the entire loan amount). In some cases, the lender must first provide you with notice before accelerating the debt and give you the opportunity to cure the default.
If you don’t cure the default, in cases where you get this opportunity, or if you’re unable to repay the outstanding mortgage loan balance, the lender can foreclose your home in the same manner as if you had fallen behind in payments. (To learn what you should—and should not do—if you’re facing a foreclosure, see Foreclosure Do’s and Don’ts. To learn about foreclosure procedures in your state, see Summary of State Foreclosure Laws.)
Loan servicers sometimes mistakenly buy expensive force-placed insurance even when the borrower already has other coverage in place. If your loan servicer wrongfully buys pricey property insurance on your behalf, you may send the servicer what’s called a “notice of error” saying that it made a mistake on your account. If your servicer doesn’t respond—usually it gets 30 business days to do so—consider talking to an attorney, especially if the servicer starts a foreclosure. Under federal law, the servicer is supposed to cancel the policy within 15 days after getting proof you have insurance and refund any duplicate coverage costs.