Force-placed insurance is a growing problem in the note investing space. If you want to protect your note investments from force-placed insurance, there are a few things that you need to know. In this post, we will talk about what forced placed insurance is and how it can affect note investors as well as homeowners with loans. We’ll also discuss some of the steps that note investors can take to avoid being affected by this type of policy.
What Is Forced Placed Insurance?
The lender places a force-placed insurance policy on a property when the mortgage borrower’s (the homeowner’s) own insurance coverage has lapsed or is deemed insufficient to adequately safeguard the lender’s interests.
Why Have Forced Placed Insurance?
Mortgage insurance is designed to safeguard the lender’s financial interest in a property loan. Homeowners are generally required to purchase their own mortgage insurance, although there are times when obtaining this protection is impossible or ineffective. The following are some of the most common reasons for not being able to get mortgage insurance:
- The property was sold via contract for deed.
- Property was not kept up to satisfactory condition.
- Failure by the homeowner to pay premiums which required full upfront payment which borrower could not afford.
How Does Force-Placed Insurance Work?
If a lender needs insurance on a property to safeguard its interests, both insurers and mortgage borrowers must be aware of several things.
This insurance is only intended to reimburse the lender for the outstanding balance of the loan. The policies we have worked with offer the option of “replacement coverage.” Replacement coverage covers the amount insured in case of a covered peril such as a fire.
Force-placed insurance is more expensive than a homeowner’s policy. The policy in most instances also provides less coverage than a traditional homeowner policy. Policies tend to be higher cost as the properties are at higher risk of a loss.
Just as with standard homeowner insurance, if a property is damaged or lost, a claim is filed. The lender will notify the insurance company who will evaluate the claim and determine if the claim is covered or not covered.
How Do You Place Forced Placed Insurance on a Property?
A lender may at any time put a policy on a home. For the lender to be reimbursed for their expenditures, they must adhere to CFPB standards. This includes sending letters to a borrower seeking a copy of their insurance policy with a follow up letter. Our recommendation for new note investors is to order the insurance through their servicer. We recommend using BIFI Loan Servicing as your servicer. Their FPI coverage includes a property pre-foreclosure and post-foreclosure. They also are well versed on FPI and provide coverage for different types of loans such as a traditional mortgage as well as a contract for deed.
To connect with BIFI Loan servicing, reach out to firstname.lastname@example.org.