You require your borrowers to maintain adequate, continuous coverage on their mortgaged properties. This protects you and your investors should damage occur to the property you are holding as collateral for the loan. This is essential for alleviating the risk to which your institution is exposed and protecting your bottom line.
However, homeowners may not be sufficiently diligent in maintaining their policies. The insurance may lapse or be canceled by the insurer. You may also deem the coverage of the plan to be insufficient to cover your investment. In these cases, lender-placed insurance ensures that you and your institution are protected.
Essential Protection Provided by Lender-Placed Insurance
The loan portfolios of lenders often incorporate many different types of properties that present a variety of risks. Therefore, most insurers offer customized plans to meets these circumstances. For example, lenders placed insurance can cover both commercial and residential property from damage done by:
The coverage is based on the replacement cost of the property, not just the outstanding loan balance. Though, unlike most traditional homeowners’ policies, lender-based insurance does not cover the personal effects of the borrower.
Finally, it is important to note that even though you, as the lender, source the policy, the borrower continues to be responsible for paying the premiums. Typically, your institution pays the costs upfront. These are then added to the borrowers’ monthly loan payments.