Seller Financed property, seller not placed on Insurance Policy
MI · Member since 2011 · 228 posts · 75 votes
Seller Financed property, seller not placed on Insurance Policy
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votesThe Mortgagee does not need permission to get added to the insurance policy. If Mortgagee knows who the current insurance provider is, all they need to do is call and give their Mortgagee information and perhaps send over a copy of the mortgage and note. The insurance company will comply.
If insurance company is unknown, the lender should send a specific letter dated and to the borrower stating the situation in detail. Give the borrower 10 days to forward to the lender proof of insurance with the Mortgagee as a beneficiary. (provide the mortgagee clause in the letter) In the letter inform the borrower that failure to complete the action and forward the correct documents to the lender will force the lender to assume the property is not insured and the lender will exercise their rights within the mortgage and note to insure the property. Include a little statement that says, this is not an insurance policy to substitute the borrowers requirement and the borrower is not a beneficiary of said policy. Include the point that the borrower is responsible for the repayment of any and all expenses related to the same. I would also include the language within the note which triggers the Acceleration Clause in the note and mortgage. The acceleration clause are events which allow the lender to call the total loan due, lack of insurance is not always one of them, so look this up in the documents.
I would get away from phone calls, get into the letters. Maybe do it twice, just to prove to any court you gave plenty of chance to the borrower. Then I would pick up the phone and purchase LPI (lender place insurance). Then send the bill the to borrower. (the lender will have to pay for it in advance).
Sometimes there is language in the note and security instrument that allows a lender to not only collect on any and all advances (such as taxes, insurance and legal fees) but also charge interest. I would in writing point that out the borrower.
If you have the right as the lender to call the note due, ensure you send a couple of notices to the same. You want to start building your case so when you get to court (if it goes that far) all the lender's ducks are in a nice pretty row.
10 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
What's his promissory note and deed of trust say? Typically, the promissory note would specify that insurance is required with the lender named. If its not provided, the lender has the right to buy it and bill the lender. The lender may be able to foreclose if its not paid.
- Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes14y
quick guess here, but that's probably some sort of breach or default and he could theoretically foreclose for that...some big mortgage companies will purchase insurance at the buyer's expense..not sure how that would work on a seller finance transaction...anyone else??
- MI · Member since 2011 · 228 posts · 75 votes14y
The PN and DOT states that the seller must be insurance beneficiary to the extent of the loan balance. Pretty standard deal.
Okay, maybe he should find another trustee, sue the buyer and take the property back (and pocket the 10k down payment). Pretty expensive phone call if you ask me!
You'd think the closing attorney's office would be required to assure that this was taken care of.
Freaking memphis!
Thanks
PG
P.S. Bryan, you know my partner and brother-in-law, Tom Cullen. He's said good things about you.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
If property insurance lapses Lenders can do what's called "forced place insurance" on your mortgage.
Generally the lenders buy the Cadillac plan that covers everything and escrows the payment into the total mortgage payment due.
It is much cheaper for the borrower to have their own insurance then for the lender to force place it.
He could always accelerate and foreclose depending on how costly and time consuming that is for that state.
I would think foreclosing and accelerating the note would be the same motivation as when a tenant tells you a few more days and you will get the money and you file eviction and the money magically appears.
It seems if he sends the foreclosure and default notice the buyer will know they are serious.
Definitely need to look at finding a new title attorney if you are going to continue to conduct owner finance transactions. Our title attorney won't close without the insurance policy in hand.
Edit / Addition:
Are you using a loan servicer and escrowing the taxes and insurance? Is there any insurance policy on the house right now?- MI · Member since 2011 · 228 posts · 75 votes14y
Travis,
There is insurance on the property, but the buyer didn't put the seller financer on the policy as "mortgagee".
PG
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
Then, as far as the lender is concerned, there is no insurance. I've had letters from auto lenders a couple of times when there was confusion about the insurance stating they would buy insurance and bill me. The lender should send these borrowers a letter stating the same thing. "Buy insurance with us listed as the lender by such and such date or we will buy it and bill you. Have your insurance agent provide proof of insurance by such and such date."
I like the idea of escrowing insurance and tax and using an escrow service to handle all this. It may be too later to set that up now.
The lender should also actively monitor tax payments. I was screwed by a borrower and ended up having to pay two years taxes on a house because the borrower didn't pay and then defaulted on the loan.
Oh, I see - I guess I didn't read the original post properly.
Either way, the solution I think would be a force placed policy like Jon is talking about.
And definitely look around for a new title company. I'd say it's the investor's responsibility to run a tight ship, but this kind of issue should be something that the title company knows about and insists upon solving prior to closing and transferring title.
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
The Mortgagee does not need permission to get added to the insurance policy. If Mortgagee knows who the current insurance provider is, all they need to do is call and give their Mortgagee information and perhaps send over a copy of the mortgage and note. The insurance company will comply.
If insurance company is unknown, the lender should send a specific letter dated and to the borrower stating the situation in detail. Give the borrower 10 days to forward to the lender proof of insurance with the Mortgagee as a beneficiary. (provide the mortgagee clause in the letter) In the letter inform the borrower that failure to complete the action and forward the correct documents to the lender will force the lender to assume the property is not insured and the lender will exercise their rights within the mortgage and note to insure the property. Include a little statement that says, this is not an insurance policy to substitute the borrowers requirement and the borrower is not a beneficiary of said policy. Include the point that the borrower is responsible for the repayment of any and all expenses related to the same. I would also include the language within the note which triggers the Acceleration Clause in the note and mortgage. The acceleration clause are events which allow the lender to call the total loan due, lack of insurance is not always one of them, so look this up in the documents.
I would get away from phone calls, get into the letters. Maybe do it twice, just to prove to any court you gave plenty of chance to the borrower. Then I would pick up the phone and purchase LPI (lender place insurance). Then send the bill the to borrower. (the lender will have to pay for it in advance).
Sometimes there is language in the note and security instrument that allows a lender to not only collect on any and all advances (such as taxes, insurance and legal fees) but also charge interest. I would in writing point that out the borrower.
If you have the right as the lender to call the note due, ensure you send a couple of notices to the same. You want to start building your case so when you get to court (if it goes that far) all the lender's ducks are in a nice pretty row.
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
The responsibility of ensuring the mortgagee is listed as a beneficiary is as much the responsibility of the mortgagee as it is the mortgagor. Once the lender identifies themselves and provides proof of identity by way of the mortgage, the insurance company will keep the lender on the mailing list at the same time as the borrower for policy renewal, etc. The insurance provider has a responsibility to put the lender on notice in the event a policy lapses as insurance coverage has to be declared when in place and not in place so the insurance company avoids its own liabilities.
Whether the borrower wants the mortgagee on the insurance or not is irrelevant. The insurance company has an obligation to insure the interests of the mortgagee.
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