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Understanding Lender-Placed Insurance

Understanding lender-placed insuranceWhat is lender-placed insurance?

People use many different terms to refer to insurance that a bank or mortgage servicer places on a house. You may hear the terms lender-placed insurance, creditor-placed insurance, or force-placed insurance. Banks and mortgage servicers usually issue lender-placed insurance in response to three situations:
  1. The homeowner’s property insurance has lapsed, been withdrawn, or been cancelled
  2. The homeowner’s property insurance doesn’t provide adequate coverage
  3. The bank or mortgage servicer has no record of adequate homeowner’s insurance coverage

Why is lender-placed insurance necessary?

Homeowners’ insurance protects the owner from loss or damage to a house or property. It also protects the mortgagee (the lender) from financial risk. Almost all mortgages allow lenders, banks, and servicers to acquire insurance for a house if it’s necessary to protect their financial interests in the property. Without adequate homeowners’ coverage, both the homeowner and the lender/servicer could incur a financial loss in the case of catastrophic damage. The amount of loss to each party would depend on the loan size and mortgage equity.

How does lender-placed insurance work?

Depending on your loan type, if you have not provided ditech with proof of suitable insurance coverage, we may obtain an insurance policy on your behalf, in accordance with state guidelines. This coverage is generally basic coverage. It ordinarily provides insurance protection only to the lender for the loan balance. The borrower will be responsible for paying the monthly premiums on lender-placed insurance coverage. Please note that this coverage is often more expensive than regular insurance coverage you can obtain on your own. It’s in your best interests to purchase your own homeowners’ insurance policy from a reputable insurance agency.

How does flood insurance figure into force-placed insurance?

Homeowners of houses built in flood zones must purchase the legally required minimum of flood insurance. How do you know if you’re in a flood zone? A good place to start is the Federal Emergency Management Agency or FEMA. On FEMA’s Flood Map Service Center website, you can type in your address to find your official flood map. Another good source of information would be a city zoning office, your realtor, or your insurance agent. If your property is located in an area designated by FEMA as a Special Flood Hazard Area (SFHA), you are required to have flood insurance coverage. You must provide ditech with proof of continuous flood insurance coverage in order to avoid force-placed flood insurance. Even if your home is not located in a SFHA, you may want to consider purchasing flood coverage. Every year individuals with homes outside SFHAs sustain damage due to floods, costing millions in uncovered losses.

Canceling my lender-placed insurance

Lender-placed insurance is usually a temporary measure. We will cancel the coverage once we have determined that you have purchased your own policy and that it’s adequate and in good standing. Depending on the effective dates of your coverage, ditech can cancel the lender-placed insurance policy, either partially or completely.
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