Mortgage insurance requirements-know your rights!

When you borrow money to buy a home, the lender considers the home as collateral for the mortgage loan. To protect the property that secures their loan, lenders will require you to maintain insurance as long as you owe them money.

You should know your rights and obligations regarding lenders’ insurance requirements. This article outlines some of the most important facts you should know.

Q: I’m buying a home. Do I have to purchase homeowners insurance from the source the bank suggests?

A: No. A bank cannot require that you buy insurance through any particular insurance company, agent or broker. (This rule applies not just to mortgage lenders, but to loans used to finance the purchase of other types of property-autos, etc.) In fact, a bank that is not licensed to sell insurance should not “suggest” an insurance source, period. NYS 1m. Law §2502.

You should check out your alternatives. Professional, independent insurance agents, including us, can access a variety of insurance companies on your behalf.

Q: The bank wants me to buy more insurance than the house is worth. Can they require this?

A: The most insurance you can be required to buy in connection with a mortgage is the full replacement cost of the improvements (e.g., the buildings) on the property. Sometimes this figure is considerably less than the mortgage amount, especially where the land itself is expensive. NYS Real Property Law §254,. NYS Banking Regulations §38.9.

Q: What if I fail to maintain my insurance policy?

A: If you fail to maintain insurance on your home, or fail to furnish proof of insurance to your mortgage lender, the lender can “force- place” insurance and charge you for the premium. You can prevent this by keeping your insurance in place. We can help you comply with any proof-of-insurance requirements your lender may have.

According to the New York Insurance Department, “force-placed” insurance should not cover your personal property (the contents of your home) or provide liability coverage. Depending on your mortgage agreement, “force-placed” insurance sometimes protects only the lender’s equity interest in the house itself-not yours. Nevertheless, sometimes “force-placed” coverage is quite expensive.

In other words, “force-placed” policies do not adequately protect you. They should never be considered a substitute for your homeowners policy. NYS Ins. Dep’t. Circ. Lttr. No. 14 (1995).

Q: The bank is going to make me pay into an escrow account for insurance premiums. I’m afraid they won’t pay my insurance bills on time. Can they require this?

A: Yes. Your mortgage agreement may include an escrow requirement. Banks have been known to pay premiums late, especially in times of high interest rates. But as long as you promptly forward to your lender any premium bills that come to you and keep up with your escrow account payments, you are protected against any losses resulting from the lender’s failure to make timely payments. NYS Banking Law §6-k.

Also, your insurance company cannot cancel coverage for nonpayment without alerting you know. NYS Ins. Law §3425(n).

Q: The bank says I must bring a paid-up insurance policy to my mortgage closing. Can they require this?

A: No. Mortgage lenders are required to accept a binder (in lieu of an actual policy). This requirement applies to mortgages on one to four family residences. However, the lender can require you to furnish a receipt indicating that the annual premium on the policy has been paid. This agency can provide you with all necessary insurance documents for your closing. NYS Ins. Law §3404(h); NYS Banking Law §6-j.

Q: The bank says I must buy a flood insurance policy. Can they require this?

A: Federal law prohibits mortgage lenders from making loans in officially designated flood hazard areas, unless flood insurance is taken out and maintained. Standard homeowners policies exclude coverage for flooding and mudslides, so flood insurance can be an important pan of your protection. We can help you obtain flood insurance. Public Law 103-325, Title v:

Contact us anytime for insurance to protect your home and its contents.