If you breach your mortgage contract by not having homeowners’ insurance, you might face added costs and, eventually, foreclosure.
Defaulting on a mortgage loan means failing to keep the promises you made when you signed the promissory note and mortgage contract. Most notably, if you fall behind in payments, you'll be in default.
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, you might also face a foreclosure.
Common Types of Mortgage Defaults
Other than nonpayment, the most common causes of default are failing to pay the property taxes (when you don't have an escrow account) and transferring the home's ownership without the lender's permission.
Also, 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 get or maintain insurance coverage, in most cases, you'll violate the loan contract.
What Happens If You Don't Have Homeowners' Insurance In Place
If your loan isn't escrowed and you fail to have homeowners' insurance as your loan contract requires, 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.
What Happens If You Don't Reimburse the Servicer
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. In some cases, the lender must first provide you with notice before accelerating the debt and allow you to cure the default.
If you don't cure the default, in cases where you get this opportunity, or if you can't repay the outstanding mortgage loan balance, the lender can foreclose your home in the same manner as if you had fallen behind in payments.
Talk to a Lawyer
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.
To learn about foreclosure procedures in your state, see Summary of State Foreclosure Laws.
Legal Information & Books from Nolo
