Considering a Short Sale? Don't Let Your Homeowners Insurance Lapse!

When homeowners are struggling financially and considering a short sale, there are a lot of competing priorities. Mortgage payments may already be behind, bills are piling up, and the stress of figuring out what to do with the house can be overwhelming. I get it. I've helped more than 100 homeowners successfully navigate short sales over the years, and I know these situations are rarely easy.

But there's one important detail that homeowners sometimes overlook when they're behind on their mortgage payments: keeping their homeowners insurance policy active.

And it's a big one!

When money is tight, it's understandable to start prioritizing which bills get paid. If you're already missing mortgage payments and considering selling your home through a short sale, you might assume that paying for homeowners insurance isn't as important anymore. After all, you're planning to sell the house anyway, right?

Not so fast.

Here's the reality: Until the sale closes and ownership transfers, the property is still yours, and an uninsured loss could make an already difficult financial situation much worse.

Imagine a pipe bursts and causes extensive water damage. Or there's a fire, a break-in, or vandalism. Without an active insurance policy, you could be facing tens or even hundreds of thousands of dollars in damage with no insurance coverage to help pay for it. And there is no going back and purchasing retroactive coverage after something happens.

There's another important consideration. Most mortgages require homeowners to maintain adequate property insurance. If your policy lapses, your mortgage servicer may purchase what's called lender-placed insurance (sometimes called force-placed insurance) and charge you for it. This coverage is often significantly more expensive than a traditional homeowners policy, may provide less protection, and typically protects the lender's interest in the property rather than your personal belongings or liability.

Those additional insurance charges can also increase the amount owed on your mortgage, potentially complicating an already challenging short sale negotiation.

And here's something else to consider: Even if you're behind on your mortgage payments, your homeowners insurance may still be paid through an escrow account. Don't assume it's being paid, though. Verify it! Mortgage servicers sometimes continue paying insurance premiums when a loan is delinquent, but that doesn't mean you should count on it without checking.

This is why, when I'm helping a homeowner evaluate a potential short sale, I encourage them to answer a few important questions:

• Is there an active homeowners insurance policy?

• Who is the insurance carrier, and when is the next premium due?

• Is the policy being paid through the mortgage escrow account or directly by the homeowner?

• If the home is vacant or will become vacant, has the insurance company been notified?

• Does the existing policy provide appropriate coverage for the property's current occupancy and condition?

That last point is especially important. Some homeowners move out before their short sale is completed. But many homeowners insurance policies have restrictions or exclusions relating to vacant or unoccupied properties. Depending on the policy, you may need additional coverage or a different type of insurance altogether.

A short sale can take time. Lender approvals, negotiations with other lienholders, and buyer financing can all affect the timeline. During that process, protecting the property remains incredibly important.

I understand that when you're facing financial hardship, the last thing you want to hear about is another bill that needs to be paid. But letting your homeowners insurance lapse can create financial consequences far greater than the cost of maintaining coverage.

My advice? Before making assumptions about your insurance coverage, contact your insurance agent and mortgage servicer. Confirm that your policy is active, appropriate for your situation, and that premiums are being paid. If you're having trouble affording the insurance, ask about available options before allowing coverage to lapse.

Having helped Sacramento homeowners through more than 100 successful short sales, I know that these situations can feel overwhelming. My goal is always to help people understand their options, avoid unnecessary complications, and make the best decisions they can under difficult circumstances.

A short sale may be one way to move forward financially. In the meantime, don't overlook protecting the home you still own.

If you're considering a short sale in the Greater Sacramento area, I'm happy to have a confidential, no-pressure conversation about your options. Reach out at erin@erinstumpf.com or call/text 916-342-1372.