When a homeowner allows his or her insurance to lapse, what can the lender do to insure the property?

• A. Refinance the loan
• B. Force-placed insurance (correct)
• C. Cancel the loan
• D. Do nothing

Answer: (B)

When a homeowner lets insurance lapse, the lender’s priority is protecting the loan’s security. Lenders require hazard or homeowners insurance to cover the property against damage. If coverage isn’t maintained, they can obtain force-placed insurance on the property to ensure there is always active protection. This guarantees that damages won’t leave the loan non‑performing if something happens to the home, and the lender can add the cost of that policy to the loan balance or bill the borrower. The coverage from a force-placed policy is typically more expensive and may be narrower than a borrower’s own policy, which is why lenders use it only to preserve protection while the borrower gets insured again. Once the borrower reinstates an eligible policy, the lender may cancel the force-placed coverage.

Refinancing wouldn’t directly address the lapse in insurance, canceling the loan isn’t something a lender does due to an insurance lapse, and doing nothing would leave the lender exposed to risk.