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Hey All,
I am seeking advice on the proper way to charge back my borrower on a seller finance deal in which the borrower has allowed the insurance to lapse. I have a force placed policy now in place to cover.
This sale closed in early Feb 2024. The buyer was to provide proof of insurance paid in full for the first year. I received an EOI from the insurer, but turns out that he had only paid for 1 month (ultimately my oversight). The insurer says that the CC on file keeps getting denied.
The borrower is failing to respond to calls/texts/emails/letters regarding the situation.The mortgage that was signed/recorded permits the lender to recover any charges associated with the need to apply this type of insurance policy.
In this example, the annual premium that I (Lender) paid is roughly $1000. Should I break that into 12 month payments and add to his existing monthly payment? Demand a 1 time $1000 payment be made in 30 days?
Jay,
Not sure in which state the property in question is located. Foreclosure laws are unique in each state.
Couple of thoughts:
First, looking backward, this closing should never have occurred. If your instructions said proof of a one-year policy, but there wasn’t one, then no closing, and current problem is avoided.
Second, begin an immediate foreclosure. Your mortgage or deed of trust should have language included that allows you to foreclose if the borrower does not maintain insurance.
Third, until the default is cleared, or until foreclosure is final, pay the insurance policy.
Bill Cook
770-815-8727Hey Bill,
Thank you for the reply.
Yes, it was an oversight on my part. I have all buyer/borrowers pre-pay the 1st year of HOI prior to closing. The EOI looked like it had been paid in full, but he only paid for the first month.We let him know that foreclosure was to start. He acquired a new policy prior pretty quickly.
Hey Larry,
In this case, we are no longer the owner of the property but the lender. Holding an HOI policy is not possible. In this case, it was simply a breakdown in my processes where I overlooked an important detail.
In my early days, I’d do a Contract for Deed arrangement and remain on title/insurance. This came to be a massive headache when the buyer/borrower (tenant) had a legitimate HOI claim to do storm damage. It’s just not worth it, when you can create a Note/Deed of Trust and move all that liability to the borrower.
Larry, I’m unsure what you mean when you say, “Provide my own insurance.”
Remember, to insure a property, you have to have an insurable interest. In this case, as lender I can pay the BORROWER’S premium to keep policy valid. However, because I don’t OWN the property, then I can’t get a policy on the property. Well, I can, but it’s an invalid policy.
Bill Cook
770-815-8727Jay,
Sounds like you have the problem solved.
Bill,
Agreed, I can’t have HOI on a property I sold, but can buy my own forced place insurance to protect my loan. And I “may” be able to go to the buyers insurance co. and post pay the insurance to bring it current and the bank will refund the forces placed insurance. However, that doesn’t always work, as some insurance companies will cancel the policy and will not let you bring it current. Had one like that last year.
Now, you can hold property in trust (prior to selling it) and sell the bene interests to the new owner but you be the trustee (or your friend is the trustee). As property manager or trustee, you get HOI on the property in the name of the trust, naming others as additional insured (bank, new buyer), and have a clause in your sales agreement that says you remain as trustee until your buyer pays off the loan. That way, you’re in control of everything.
However, glad things worked out well.When I have done private money loans, I have a secondary insurance company Lloyd’s of London. And the addendum that I have my deed of trust, make some aware that when they fail to pay, I will pay someone else 3 or 4 times as much it will cost them.
And that balance that I pay plus my time will be added back to the attorneys fees and add to the charges of the deed of trust, note, or land contract.
I always get a guaranteed 1st lien position from the title company in writing prior to signing and funding.
I explained to the borrowers when I buy the secondary insurance from Lloyd’s of London you get to pay and because I’m buying it. I can only answer myself not you!
It’s true.
Dan Butler
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