My home insurance was included in my mortgage payment. What happens now?
If you default on your loan payments, the property insurance policy in your name will get canceled. The mortgage company will put its own policy on the home to protect its investment in the collateral (your house). This is called collateral protection insurance (CPI) or forced place insurance. The policy is very expensive, so if you try to reinstate your loan by making a lump sum, catch up payment, expect that the fees for this insurance will be added on to the reinstatement payoff figure.
Keep in mind that CPI only insures the mortgage company. It is not your insurance policy. And it only insures the structure against damage. It will not insure your personal belongings inside the home against damage or loss.
Can I get my own insurance during the foreclosure?
Yes. Although this will not necessarily prevent the CPI premiums from adding on to the balance owed to the mortgage company, you can and should get personal property insurance for the contents of your home if/when your homeowner's insurance policy gets canceled due to a default on your mortgage payments.
The policy you need is similar to a renter's insurance policy. You can obtain it directly from a private insurance company. If you have unique valuable items (e.g., expensive jewelry), you may need to get these items appraised before they will be covered under the policy. Check with your insurance agent.
My home has been damaged, but I'm in foreclosure. Who do I call to make a claim?
You will need to contact your mortgage company to inform them of the damage (e.g., flooding) and inquire about making a claim against the CPI policy. The policy will only pay for repairs to the structure, not to replace damaged personal property.
This can be an awkward phone call to make during foreclosure, but you need to inform your mortgage company of the problem as soon as possible. If you fail to do so and the problem worsens (e.g., water pipes freezing and breaking in a vacated home during winter), the mortgage company may later claim that you are liable for property damage expenses in addition to your deficiency balance on the foreclosed mortgage.
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