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Does Homeowners Insurance Remain in Effect for a Homeowner in Possession Following a Foreclosure?

by K.C. Hernandez

It might be in your best interest to stay in your house after a foreclosure for both economical and practical reasons. In doing so, it's also necessary to keep current on any home-related obligations, which at that point are minimal. Renter's insurance is the only type of insurance you may need if you remain in possession of a home after foreclosure, as the homeowners insurance coverage no longer applies to you.

What Happens In Foreclosure

Mortgage loan agreements include a clause which allow your lender to take ownership of your home and sell it if you default on the loan. You typically have at least three months after a missed payment before preforeclosure proceedings begin. You may also have several months to more than one year before the actual foreclosure auction happens, depending on your state's foreclosure laws and how aggressively your lender pursues it. You remain responsible for the homeowners insurance when in foreclosure, whether or not you live in the home, and your policy remains in effect until the home changes ownership.

What Often Happens to Insurance

Many cash-strapped homeowners on the verge of losing their homes neglect to pay for homeowners insurance. They may allow it to lapse, fail to renew the policy or be cancelled by their insurance provider. Insurance providers may deem a foreclosure in poor condition a high risk and cancel the policy if the homeowner fails to bring the home up to standard. Homeowners insurance serves a lender's financial interests as well as a defaulted owner's, as damage to the property from inclement weather, theft or fire can render a home uninhabitable and a total loss. As such, lenders may "force-place" insurance, buying a policy on behalf of the owner to ensure the home is adequately covered.

What Remains After Foreclosure

Usually, lenders exercise the right to evict remaining occupants who are not renters of the former homeowner. A remaining renter may stay until his lease is up or until the lender follows applicable protocol under statutes which protect renters in foreclosure. As the former owner, however, you don't have the same protections, and you become a tenant of the new owner -- usually the lender -- for all intent and purposes. You may remain for practical reasons, such as the inability to find suitable housing, because the lender is allowing you a predetermined grace period to move out or because the lender has extended a formal lease agreement to you. Regardless of your motives for staying, a homeowners insurance policy no longer names you as a beneficiary because you are no longer the owner. The current policy is in effect for the new owner's benefit.

Insurance You Might Need

Even though you lose your home in foreclosure, you still own the valuable personal items within the home -- with the exception of fixtures -- which renter's insurance can protect. If you plan to remain in the house under a month-to-month lease with the lender, it makes sense to protect your possessions with renter's insurance, especially if you couldn't afford to replace them if they were destroyed or stolen. Renter's premiums are less expensive than homeowner's insurance, costing as little as a dollar per day, according to Money Crashers.

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