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How Does Homeowner’s Insurance Work in a Foreclosure?

If you're facing foreclosure, chances are good that you have many worries on your mind. After all, you stand to lose the home that you've worked so hard to keep. In addition to the psychological and physical disruptions that your foreclosure is likely to cause for your family, you'll have plenty of financial issues to keep straight as well. For instance, your foreclosure could wreak havoc on your credit score and make it difficult for you to obtain a new mortgage loan within a reasonable time frame. What's more, you might be forced to raid your personal savings reserves in a futile fight against your mortgage lender.

Although you might not realize it, you'll also have to take into account the likely cancellation of your homeowner's insurance policy. After all, most homeowner's insurance companies bundle their policies' premiums in with their holders' mortgage payments. Once you've stopped making your mortgage payments, it's likely that your homeowner's insurance company will void your policy and leave your home without protection.

If you're resigned to the fact that you'll lose your home in foreclosure, you might be comfortable with this arrangement. After all, it will remove a significant financial burden from your shoulders and force your mortgage lender to take responsibility for your home.

If you wish to fight your foreclosure proceedings, you'll need to "reaffirm" your mortgage. This will require you to pay off the loan's delinquent balance and remain current on its monthly payments for the foreseeable future. Naturally, this will require you to make homeowner's insurance payments as well. Unfortunately, you may have to seek another homeowner's insurance provider and prepare to pay a hefty premium for your coverage. After your policy's cancellation, it's unlikely that your current provider will take you back without raising your premiums by a significant margin. Likewise, other insurers might view your brush with foreclosure as a major risk factor and charge you accordingly.

If you're willing to accept the loss of your home to foreclosure, you'll still need to obtain provisional insurance that covers the contents of your home during the foreclosure process. Such a policy might be known as a "possession protection" or "home contents" plan. Although it won't technically be renter's insurance, it will function in a similar manner: You'll be entitled to reimbursement for damage to any personal possessions that you store in your home. To protect its post-foreclosure "investment," it's likely that your mortgage lender will obtain "structural protection" on its own account.

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