Homeowners insurance needs to cover your outstanding mortgage balance so if you no longer have that insurance equal to the balance, you are legally in violation of the terms of your loan. If you are in default according to the terms on your home loan, your lender could foreclose but chances are your mortgage lender could take less invasive actions.
Homeowner insurance also called hazard insurance is required on any home with a mortgage. This keeps the property insured for the amount equal to or greater than your loan balance. The only exception to this rule is if you own small waterfront property where the land, which cannot be ensured, has a much greater value than your house structure. Your lender wants to protect its investment hence homeowners hazard insurance.
If you lose your homeowners insurance each lender has specific actions that they need to take to provide insurance protection. For FHA, homeowners insurance requires a replacement feature that provides the replacement amount of the damage to the property regardless of the current cost. This means that the home can be repaired regardless of any price increases in labor or materials.
Most mortgage loan terms state that if the homeowner does not have active hazard insurance on the home, the loan can fall into default. However, lenders usually do not enforce their rights to foreclose unless you are delinquent on your mortgage payments. You’ll need to examine the language in your loan terms to find out what happens if it becomes uninsured. If insurance is canceled for any reason, you want to immediately replace it to avoid any consequences of a defaulted loan.
Often times, lenders may purchase insurance for you to protect their own investment. They will add this cost onto your monthly mortgage payment and although it may sound convenient, this type of insurance could be up to five times more than if you had purchased it yourself. Lenders will take immediate action to protect their collateral and this may mean getting some of the highest priced premiums in homeowner insurance.
If for any reason your homeowner insurance is canceled it is highly critical to reapply and find new insurance. You can easily save yourself hundreds of dollars in additional costs per month and a lot of headaches.