If you don't pay your insurance bill on time, you'll have a “lapse in homeowners coverage” until you pay the balance or secure a new policy. This lapse can have serious consequences, especially if you have a mortgage. Mortgage documents typically require you to maintain adequate insurance coverage. This is because the lender wants to ensure that any damage to your property is taken care of to protect their financial interest in the property. If damage occurs during a lapse in coverage, and it’s determined that the damage happened while your insurance was inactive, it won't be covered. This can leave you with significant out-of-pocket expenses.
When a homeowner has a mortgage, the lender will usually require continuous insurance coverage on the property. If the homeowner's insurance lapses, the mortgage company often steps in to ensure the property remains insured through a process known as force-placed insurance or lender-placed insurance. This type of coverage may be backdated to avoid gaps, but the premiums for force-placed insurance are typically much higher than standard homeowners insurance. The cost is added to the mortgage payments, and the homeowner is responsible for paying these premiums.
It's crucial to understand that force-placed insurance mainly protects the lender's interest, meaning it may not offer the same level of coverage for the homeowner’s personal property or liability as a regular homeowners policy would.
Your premiums may increase.
If you catch the lapse in your insurance within a few days, your insurance company might reinstate your policy. Reinstatement allows your policy to continue without considering the lapse, provided you make the payment. However, this is often an exception rather than the norm.
You could face difficulty securing coverage with a new insurer.
After a policy lapse, securing new coverage from other insurance carriers can be challenging. The insurer that covered you before the lapse might not offer a new policy based on their underwriting guidelines. If your home sustained damage during the lapse, you may need to provide documentation of repairs before any new coverage can be issued.
In most situations, you'll need to pay any overdue amount and start a new policy with a new effective date. Even a brief lapse can lead to higher premiums, as your insurer may view you as a higher risk due to the period without coverage. Any rate changes — especially increases — that would have applied at the next renewal will typically take effect with your new policy.
Is It Bad to Let Home Insurance Lapse?
Yes, letting your home insurance lapse can be very detrimental. Besides losing coverage for your property, you might face higher premiums when reinstating a new policy or purchasing force-placed insurance through your lender. Additionally, a lapse in coverage can leave you financially vulnerable in case of damage to your property during the period without insurance.
What Happens to My Mortgage if My Homeowners Insurance Is Cancelled?
If your homeowners insurance is canceled, your mortgage company will likely purchase force-placed insurance to protect its investment. This coverage is generally more expensive and may not offer the same level of protection as your original policy. The cost of this insurance will be added to your mortgage payments, increasing your overall monthly expenses. To avoid this, it’s crucial to maintain continuous insurance coverage or promptly secure a new policy if your current one is canceled.
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