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What is Mortgage Impairment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2016
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    Conjecture Corporation
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Mortgage impairment is a common type of insurance policy that serves to protect the interests of the lender in any given mortgage contract. The idea behind this type of coverage is to prevent the lender from incurring losses that may occur when the property is damaged or destroyed and the debtor has failed to maintain insurance coverage that would offset the loss. Mortgage impairment insurance is also helpful in situations in which error in the management of the asset has resulted in a loss that increases the risk level of the lender.

Many forms of mortgage impairment insurance address a wide range of potential situations in which the property held as collateral could sustain some type of physical damage. This would include coverage for damage from fire, wind, water, or lightning. The exact scope of the impairment insurance is determined by the terms of the mortgage contract. Essentially, any types of property coverage that the borrower is required to maintain on the property for the duration of the mortgage will also be covered under the terms of the mortgage impairment policy. This mirroring of the requirements between the two forms of coverage is often known as covering the required perils.

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Mortgage impairment coverage is also often helpful in situations where lenders must foreclose on properties after a borrower defaults on a mortgage. In many jurisdictions, the impairment insurance serves as interim protection for the lender until the foreclosed properties can be sold to new owners, who then are charged with the responsibility of obtaining property insurance for the duration of the new mortgage agreement. This helps to protect the lender from possible damage from weather or other events during the foreclosure process and up to the point that the property is sold.

It is important to note that mortgage impairment coverage does not absolve the borrower of the responsibility to maintain property insurance on the real estate he or she acquires from a lender under the terms of a mortgage contract. The assumption is that the borrower will comply with the terms of that contract, and secure and maintain insurance coverage that is in compliance with the provisions outlined in the mortgage agreement. Many lenders will require documented proof that property insurance is obtained by the borrower, often in the form of an insurance certificate or some other proof of insurance prepared by the insurance provider. The impairment coverage is only activated in the event that some type of disaster damages the property, and the lender subsequently learns that the borrower has failed to maintain the level of insurance coverage cited in the mortgage agreement.

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