Insured But Not Covered: Closing Fails

If you've already insured your house but the closing fails, it's important to understand your rights and options. In most cases, homeowners are required to have home insurance in place before closing on a property, especially if they are taking out a loan from a mortgage lender. This is because lenders need to protect their financial investment in the property. If the closing falls through, it's essential to review your contract and consult with your real estate agent or a legal professional to understand your options and obligations. You may need to negotiate with the seller to resolve any disputes or make alternative arrangements. It's also crucial to maintain open communication with your insurance provider and lender to avoid any unexpected costs or complications.

Lenders require proof of insurance before closing

Your lender will require you to have enough homeowners insurance to replace your home. This is called the replacement cost and is the cost to rebuild it from the ground up. This number is different from the home’s market value or purchase price. The amount of insurance required by the lender is based on the replacement cost of your home.

You will need to provide proof of insurance coverage prior to closing. This could be your home insurance binder, which is a one-page document that provides temporary evidence of coverage. If you already have your policy declarations by the time your closing date arrives, that works as proof of insurance as well.

Most lenders require proof of homeowners insurance a minimum of three business days before your closing date. Some lenders might require proof of insurance as early as two weeks before closing day. Not having insurance in time could delay closing.

Your lender may also require that your insurance company includes a clause in the policy stipulating that your coverage can’t be canceled without a minimum of 30 days' written notice to the lender.

Buyers should shop around for insurance

When it comes to buying a house, shopping around for insurance is a crucial step that buyers should not overlook. Here are some reasons why buyers should take the time to explore their options when it comes to home insurance:

Finding the Right Coverage:

Shopping around allows buyers to find an insurance policy that best meets their needs. There are different types of home insurance policies available, and it's important to understand the coverage each one provides. For example, a replacement cost policy will pay to repair or rebuild your home based on current construction costs, while an actual cash value policy will factor in depreciation. By comparing policies from multiple insurers, buyers can ensure they get the level of coverage they need.

Cost Savings:

One of the most significant benefits of shopping around for home insurance is the potential for cost savings. Different insurers offer different rates, and by getting multiple quotes, buyers can find the most competitive prices. Additionally, many companies offer discounts for bundling multiple policies, installing smart home technology, or having a "green" home. Shopping around enables buyers to take advantage of these opportunities to save money on their insurance premiums.

Understanding Exclusions and Deductibles:

When shopping for home insurance, it's essential to pay attention to exclusions and deductibles. Exclusions refer to specific incidents or events that are not covered by the standard policy. For example, flooding, earthquakes, landslides, and mudflows are often excluded from coverage. If buyers are at risk for any of these perils, they may need to purchase additional coverage. Similarly, understanding deductibles is crucial. The deductible is the amount the buyer is responsible for paying before the insurance company covers the rest. Deductibles can be a set dollar amount or a percentage of the policy's dwelling coverage. By shopping around, buyers can find a policy with a deductible that fits within their budget.

Comparing Customer Service and Company Reputation:

Shopping around allows buyers to assess the customer service and reputation of different insurance companies. Buyers can look at customer reviews, complaint records, and professional ratings to get a sense of the quality of service they can expect. Additionally, checking a company's license and financial strength can help ensure the company will be able to pay out claims if needed.

Avoiding Gaps in Coverage:

When switching insurance policies or purchasing a new one, it's crucial to avoid gaps in coverage. Buyers should never cancel their current policy until they have a new policy in place or a written statement proving they have continuous coverage. Shopping around ensures that buyers can find the right policy without leaving themselves unprotected.

In conclusion, buyers should shop around for home insurance to find the best policy for their needs and budget. By comparing coverage, prices, exclusions, and deductibles, buyers can make informed decisions and ensure they have adequate protection for their new home.

Insurance may be more expensive if paid monthly

When it comes to insurance, it's important to be aware of the potential costs and how payment options can affect the overall price. In the context of "what if closing fails but I already insured the house", it's crucial to understand the financial implications, especially if you're considering paying for insurance on a monthly basis. Here are some key points to consider:

While it may seem convenient to pay for insurance in monthly instalments, it's important to know that this option can be significantly more expensive in the long run. This is true for both car insurance and homeowners insurance. Here's why:

• Higher Overall Cost: Paying monthly for insurance will usually result in a higher overall cost compared to paying annually. This is because insurers treat monthly payments as a loan, and they charge you interest on the full cost of the insurance. This interest accumulates over the year, resulting in a higher total amount paid.
• Penalty for Convenience: The extra cost of paying monthly is essentially a penalty for the convenience of spreading out your payments. This penalty can be substantial. For example, in November 2022, the average penalty for paying monthly instead of annually for car insurance was £302 in the UK.
• Increasing Costs Over Time: The cost of paying monthly for insurance has been increasing over the years. Between November 2019 and November 2022, the penalty for paying monthly for car insurance jumped by 39%. This trend suggests that the gap between monthly and annual payments will likely continue to widen.
• Higher Costs for Certain Groups: Younger drivers, who often face higher insurance premiums, are more likely to opt for monthly payments as they may not be able to afford a one-off annual payment. However, this choice results in them paying even more over time. Similarly, low-income households, who may struggle to pay a lump sum upfront, end up paying more by choosing monthly instalments.
• Credit Score Impact: While paying monthly for insurance can help build your credit score if you make regular, timely payments, falling behind on those payments will hurt your credit score. This can make it more difficult and expensive to obtain loans or credit cards in the future.
• Interest Rates and Additional Charges: When paying monthly, you may also be subject to interest rates of more than 30%, and there can be additional charges for spreading payments over 12 months. These factors further increase the overall cost of your insurance.

Given these points, it's clear that paying for insurance monthly can be significantly more expensive than paying annually. While it may be a necessary option for those who cannot afford a lump sum payment, it's important to be aware of the potential financial implications. When considering insurance options, be sure to compare quotes and understand the full cost, including any interest or additional charges, to make an informed decision.

Lenders can force-place insurance if you stop paying

This type of insurance is placed on a property when the homeowner's insurance is cancelled, has lapsed, or is deemed insufficient, and the homeowner does not secure a replacement policy. Force-placed insurance is a way for lenders to protect their financial interest in the property. It is important to note that force-placed insurance usually only covers the structure of the home and not the homeowner's belongings.

If you receive a letter from your lender stating that they are unable to confirm insurance on your home, you should take immediate steps to avoid the lender purchasing a policy for the property. Contact your insurance carrier as soon as possible and get a new insurance policy or ask to have your old policy reinstated. In the meantime, continue to make payments to cover the force-placed insurance to avoid any issues with your lender.

Once you have a new or reinstated insurance policy in place, send proof of the policy and any other requested information to your lender and request that they cancel the force-placed insurance policy. The lender is legally required to cancel the force-placed insurance within 15 days and refund any unused premiums.

To avoid force-placed insurance, make sure to maintain continuous insurance coverage on your home and provide proof of coverage to your lender when requested.

You can remove force-placed insurance once you have your own

When buying a home, there are many tasks to take care of, such as shopping for a mortgage loan and finding a property that suits your needs and budget. However, it is also essential to secure homeowners insurance before closing on a property. This is because lenders require proof of homeowners insurance before they will let you close on a home. This is their way of protecting their financial investment in your home.

If you fail to obtain insurance or let your insurance lapse, your lender likely has the right to force-place insurance on your home. This type of insurance, also known as creditor-placed, lender-placed, or collateral protection insurance, is typically much more expensive than a policy you would obtain yourself. It also may have limited coverage, excluding personal items or owner liability.

To avoid force-placed insurance, it is important to obtain a homeowners insurance policy before closing on a property and maintain continuous coverage. Most lenders will require proof of insurance a few days to a few weeks before your closing date, so it is recommended to start shopping for insurance about a month in advance. This will give you time to compare different insurers and ensure you are getting the best deal.

If your lender has already force-placed insurance on your property, you can remove it by obtaining your own insurance policy as soon as possible. Contact an insurance carrier and get a new policy or reinstate your previous policy if possible. Then, gather detailed proof of your new insurance and send a copy of the relevant documents to your lender or loan servicer. Request that they cancel the force-placed insurance policy as soon as possible. Continue to make payments on the force-placed insurance until it is cancelled to avoid any issues with your lender.

By taking these steps, you can remove force-placed insurance and ensure that you have adequate coverage for your home at a more affordable price.

Frequently asked questions