After helping countless families with finding mortgage protection policies to protect their homes in case the worst day happens, I have come across a handful of questions that are asked consistently. One of those questions is “does my lender provide this coverage” or “I thought my lender already gave me this coverage, right”. Ultimately the answer to this is not necessarily, your lender does not in most cases. It’s important to understand WHY they don’t and WHY it’s important to look at getting the coverage.
How Mortgage Protection Used to be Obtained.
Over a decade ago mortgage protection was requested and completed at the signing of the loan paperwork. I bought my first house in 2007 and I remember signing up to get the coverage. I figured it was standard practice and never thought much into it. When I bought my second home in 2015, however, the same protection was not offered. I wondered why, briefly, and shortly after my purchase I began receiving letters in the mail offering that type of protection to me. It wasn’t until years later when I began helping families with mortgage protection myself that I learned what had happened. Previously, the lenders would offer the protection at signing and essentially obtain a life insurance policy on the buyer. The lender was the owner and the beneficiary of that policy, therefore when anything happened, all the funds would go to the lender. Lenders frequently sell loans from one company to another; this is common practice. However, the owner of a life insurance policy cannot be changed like that. Essentially, once a loan was sold, the protection was cancelled and lost, unbeknownst to the buyer. Then when something happened, the new lender did not have protection in place to cover the loan. This oversight influenced insurance carriers to step in and stop the process. Now, once a loan is complete, then a third-party broker will come to offer the protection. This ensures the buyer is the owner and chooses the beneficiary to receive the money, thus preventing a loss of protection when a loan is sold off.
Do VA Loans have Mortgage Protection Built In?
Bottom line up front, no, VA loans do not automatically have mortgage protection built in. This is a common misconception among veterans with VA loans on their homes. Verify this with your lender and ask this simple question to your lender; if I have a heart attack or am diagnosed with cancer, will you clear/cover the loan? The answer will be no. Understand that mortgage protection is not just for passing away. This coverage is meant to pay out for sickness, chronic disability, terminal illness and death. To find out more about what benefits come with a mortgage protection policy, click here.
What about PMI?
PMI stands for Private Mortgage Insurance. Some lenders still offer this. Most lenders do not. When PMI is offered, and purchased, the lender will not sell off your loan. This is the same as if you purchased the protection on your own, the only difference is the monthly premium is added to your monthly mortgage payments. As mentioned above, when you do this you are making the bank or lender the beneficiary of the policy. What that means is they will receive all benefit proceeds if something happens while the mortgage is still in place. Why is this important? Imagine you have a loan for $195,000 and you purchase PMI through the lender. After 15 years of the loan, you now owe $110,000 on the loan and you pass away. The lender receives the check from the insurance carrier for $195,000 to clear the loan and retains the profit. If you had purchased it separately from the lender, and picked a family member the be the beneficiary, now that person gets the check, can clear out the loan and has $85,000 more to live on when you pass away. The other consideration is that when a lender does PMI they typically pick only one company that they have partnered with. That means the protection may not have living benefits. It may not pay out when you get diagnosed with a critical illness and can no longer work. These are important factors to consider when purchasing a mortgage loan and you should ask the lender all the details on the policy. Remember that you have the ability to choose what company you want for your mortgage protection, so do not leave it up to the lender to decide for you.
The Importance of Mortgage Protection
Regardless of what kind of protection you get, its important you get some kind of protection that will help pay off a loan when the worst day happens. You just made an investment for your family, now it’s time to protect that investment. For more information on mortgage protection, click here. Click here to get quotes on term and mortgage protection policies that could fit your needs.