Some basics about the practice
Q: How can lenders force insurance on homeowner?
Under most mortgage contracts, borrowers are required to maintain proper insurance to protect their homes from the risk of fires, floods and other hazards. If homeowners don't provide proof of coverage when asked, lenders can obtain insurance to protect their stake in the home. In many cases, those policies are later canceled when a homeowner buys their own coverage or proves their existing coverage is adequate.
Q: What's covered?
Lenders typically insure the house but provide no coverage of a home's furnishings or other contents. These policies also don't cover temporary living expenses for displaced homeowners.
Q: Don't lenders usually pay a homeowner's insurance and taxes through escrow accounts?
Yes. But up to 50 percent of borrowers at some companies are allowed to make those payments themselves.
Q: If a home goes into foreclosure, doesn't the lender wind up having to pay for this costly insurance themselves?
No. Fees related to servicing a mortgage, including force-placed insurance, are paid first out of foreclosure proceeds.