If something happens to your home, your mortgage lender loses its security. To protect against this, it requires you to carry homeowners coverage up to the loan amount. If anything happens to your property, the insurance company will ensure that both you and your lender are protected and able to rebuild.
TL;DR (Too Long; Didn't Read)
Many mortgage lenders require borrowers to have a mortgagee payment clause on their homeowners insurance policies, which protects the lender in case of property damage. If a homeowners insurance policy has a mortgagee payment clause, any insurance checks will be made payable to lenders and borrowers.
Mortgagee Payment Clause
When you get a mortgage, the lender is added to your homeowner’s insurance policy as mortgagee. This means that the insurance company will pay both you and the lender in the event of damage to the property. The lender’s name and address is added to the policy in the section “additional interest.” The lender requires you to obtain a policy large enough to cover its loan amount so that it is fully protected from loss.
Insurance Payment Monitoring
Often, lenders escrow for insurance payments. This means that you will pay your initial premium up front. The lender breaks down the payment for the next year’s premium over 12 months. It adds this portion to your monthly payment and pays your premium at renewal. If the lender doesn’t escrow for payments, you will submit a copy of your policy declarations page annually upon renewal as proof that insurance is in place. If you don’t have sufficient coverage, your loan documents give the lender the right to obtain coverage at your expense.
Insurance Claims Process
When you experience damage to your property, you will go through your insurance company’s claims process. The lender does not need to be involved at this point. It is after your claim is approved that you will receive a check made out to you and the lender. For you to cash or deposit the check, the lender needs to endorse it along with you.
Releasing the Funds
When you receive an insurance check payable to you and the lender, bring the check to its office. Speak to a loan representative and make arrangements for him to inspect the property. If you have already made the repairs using your own money, the lender will agree to endorse the check once it has confirmed that the work is complete. However, if you will be using the funds to repair the property over time, the lender will hold the money in escrow. Like a construction loan, it will disburse funds as needed based on invoices and a proposed draw schedule for the repairs.
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