Home ownership is part of the “American Dream” for millions. With the real estate sector booming as the coronavirus pandemic recedes, home purchases are on an upswing. Unfortunately, financial institutions that lend funds for home purchases face significant financial risks, particularly if homeowners do not or cannot maintain mortgage insurance on their purchases. In the state of Utah, lender-placed insurance is a common solution. Lender-placed insurance serves to protect banks and mortgage lenders from losses associated with lapsed mortgage insurance coverage. There are many myths surrounding this unique form of insurance protection; this guide serves to dispel common myths about Utah lender placed insurance.
What is Lender-Placed Insurance?
When a property buyer enters into a mortgage loan agreement, most states and lenders require borrowers to obtain and to maintain property insurance as a condition of the loan agreement. The reason for this is simple: Financial assets are at stake when a financial institution like a bank or mortgage servicing company enters into a home loan agreement with a property buyer. Utah lender-placed insurance was created to provide financial interests protection for mortgage lenders and banking institutions.
Sometimes referred to as force-placed or collateral protection insurance, this insurance solution is applied when the property buyer’s own insurance is inadequate to cover losses. The mortgage insurance on the part of homebuyers may be inadequate to provide enough coverage against losses, or the homebuyer may not maintain a policy due to:
- Policy expiration.
- Oversight on the part of the borrower.
- Cancellation or withdrawal of an existing policy.
- Failure to keep up with premium payments.
If for any reason the homeowner’s mortgage insurance is inadequate, has lapsed, or is cancelled, Utah lender-placed insurance steps in to provide coverage.
Myth #1: Staggering Costs
One of the most pervasive of myths surrounding Utah lender-placed insurance is centered on cost. Some believe that lender-placed policies cost ten times or more of a standard mortgage insurance policy. The truth is that although these policies are more expensive than the solutions obtained by homebuyers, the expense is far short of the “ten times” myth. In fact, national averages show that lender-placed policies are below two times the cost of a standard mortgage insurance premium.
Utah lender-placed insurance policies must be higher, as they must cover all risks without selection or underwriting considerations. Many of the properties covered by these insurance policies are vacant, are located in high-risk areas, or have poor loss histories. As certain lenders require continuous coverage for a mortgage insurance policy, a lender-placed policy serves as an insurer of last resort, driving up costs.
Myth #2: Only the Lender Gains Insurance Protection
When faced with the prospect of a Utah lender-placed insurance policy, some homeowners believe that this insurance only protects the lender. A lender-placed policy protects both lender and homeowner because it covers the lender against interest losses and provides the homeowners replacement cost coverage if the property were to become damaged or destroyed. Borrowers have the right to change coverage amounts if they believe it is not correct; this flexibility protects the homeowner’s financial interests as well as the lender’s.
Myth #3: Lender-Placed Insurance is Forced on Homebuyers
Certain homeowners have been misled by the term “force-placed” insurance, believing that mortgage lenders have a financial stake in setting this more expensive coverage on their properties. The truth is that lender-placed insurance is used as a last resort in most cases, and borrowers are advised every step of the way. Lenders are required by federal and state laws to provide ample notification before a lender-placed policy is put into service. This time gives homeowners the ability to shop for traditional mortgage insurance. If that insurance cannot be obtained, only then does the lender-placed coverage take effect.
Myth #4: A Lender-Placed Policy Leads to Default on a Loan
When a Utah lender-placed insurance policy is established, it does not cause a default on the loan. In fact, almost 85% of lender-placed policies are placed on loans that are already delinquent for more than 12 months before this insurance solution takes effect.
The national average for lender-placed policies is about 3% of all current home mortgages. Delinquency rates owing to the coronavirus pandemic and other economic factors have driven the average up from its historical 2% average. Once the mortgage crisis resolves as economies recover post-pandemic, the average rate is expected to fall back to its historical rate. There is no correlation between a Utah lender-placed insurance policy and the likelihood that a home loan will become delinquent or will force a borrower to default on the loan.
About BTC Insurance Services
Founded in 2011, BTC Insurance Services has proudly served Utah businesses with comprehensive and custom-tailored insurance coverages for a decade. We pride ourselves on fostering long-term client relationships with a personalized and hands-on approach, and have established a reputation built on quality and transparency. For more information about our products and services, we invite you to contact one of our reputable agents today at (855) 944-3457, or send us a message here.
