I let my home insurance lapse. The bank went out and secured a new policy, and then notified me that I'm responsible for paying the premium. The new insurance is a lot more expensive. Can the bank do this?
Yes. Loan contracts usually contain a provision requiring that you properly insure the loan collateral. If not properly insured, National banks can "force place" insurance on your behalf at any time during the term of the loan. The bank can do this if it determines that the property securing the loan is not covered by insurance—or is underinsured.
Generally, your mortgage lender will notify you if there is an issue with your hazard insurance such as a lapse in policy or the need to increase the coverage amount. The lender may ask you to provide a copy of the declaration page from the policy as proof of coverage. If you do not have insurance, the bank can purchase the insurance on your behalf. The premium on this insurance will always be much more expensive than the cost of a policy you can purchase yourself.
The bank can charge you for the cost of the insurance premiums and any fees incurred in purchasing the insurance. It can do this in one of three ways:
- requesting an increased monthly payment
- demanding the full amount of the premium at the end of the loan
- adding the premium to the unpaid balance of the loan and extending the payment period