Quick Answer: A mortgagee clause is a provision in a homeowner’s insurance policy that protects your lender’s financial interest in your home. It ensures that if your property is damaged or destroyed while you’re paying off your mortgage, the insurance company will pay the mortgagee (your lender) first — up to the amount of the outstanding loan — before paying you. This clause is typically required by lenders so they can safeguard the collateral for the loan and help make sure insurance payouts cover the mortgage balance in the event of a covered loss.
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What is a Mortgagee Clause and How Does it Work
“I still think buying a home is the best investment any individual can make.” – American financier John Paulson
Owning a home is the ultimate dream for many Americans and there’s no doubt you’ll run into some legalese along the way including terms like mortgagee. Yes, the spelling seems a little weird, but we’re about to discover the ins and outs of a mortgagee (not mortgage) clause. So what the heck is it and why do you need to know about it as a homeowner? Read on to find out what a mortgagee clause is and how it works, including the purpose behind it and the benefits of having one in your mortgage contract, then you can decide if including a mortgagee clause is right for you.
Definitions
Here are the fundamental terms you need to know, as per QuickenLoans.com:
- Mortgage: A mortgage is a loan used to buy a home from a mortgage lender or a financial institution such as a bank or credit union.
- Mortgagee: is the mortgage lender; this can include a mortgage broker/loan originator, a credit union, a bank, an individual, or another entity that lends money for real estate purchases
- Mortgagor: is the mortgage borrower; this is the buyer of the home
How Does a Mortgage Work?
A mortgage is a legal contract between the mortgagee and the mortgagor. It states that if the mortgagor defaults and fails to repay the borrowed money and interest, the mortgagee can then take possession of the home. A mortgage is most likely the largest-scale and longest-term loan you’ll have in your lifetime.
The Role of a Mortgagee
In a real estate transaction, a mortgagee has several responsibilities including lender protections such as:
- mortgage origination – a niche type of loan origination that entails vetting the mortgagor’s application, as well as processing, underwriting, and closing on the mortgage loan
- establishing a perfected lien – a specific lien filed to ensure the mortgagee has the legal right to the other person’s property if they fail to pay what’s owed
- keeping things on the up and up – a mortgagee must remain non-discriminatory and adhere to ethics while guiding mortgagors through both home buying and the mortgage approval process
- ensuring the mortgagor has the necessary insurance coverage – the mortgagee requires the mortgagor to purchase a homeowner’s and/or flood insurance policy; that way if anything happens, both parties are protected
What’s a Mortgagee Clause?
According to Investopedia.com, “A mortgagee clause is a part of your homeowner’s insurance policy that protects your lender—the mortgagee—from losses incurred due to damage to your property. A mortgagee clause ensures that if your property is damaged while you are paying off the mortgage, the insurance company will pay your mortgage lender for this loss, even though it’s covered on your insurance policy. A mortgagee clause states that if a property is damaged during the mortgage period, the insurance company must pay the mortgagee for this.”
Why You Should Think About Having a Mortgagee Clause
So how does a mortgagee clause apply to you as a homeowner? During a real estate transaction, a mortgagee gives a loan to the mortgagor who in turn puts up their newly purchased property as collateral. If your home becomes damaged, destroyed, or essentially unliveable while you’re still paying for it, you may experience financial difficulties if you need to rent another property or relocate entirely while still being required to make mortgage payments even though you can’t live in your home.
- A mortgagee clause ensures the lender will receive their money so you won’t be financially liable for any remaining mortgage debt (in the case of a total loss of home)
- It also works in the case where your damaged home must be sold by the mortgagee to pay off the remaining balance of your mortgage loan; if they don’t get enough money from the sale to cover the balance, you’d be liable to repay the difference if you don’t have a mortgagee clause to protect you
Know That a Mortgagee Clause Isn’t Automatically Included
It’s optional, so if you want to include a mortgagee clause in your mortgage contract, talk to your prospective lender before you start the approval process to ensure it can be included. If somewhere down the road you decide to switch insurance companies for whatever reason, many insurers will require proof of a mortgagee clause to ensure the right people will get any monies owed to them in the end.
Common Terms in a Mortgagee Clause
Besides basic information, including the loan number, and the name and address of the mortgagee, there are a couple of legal terms you may run across in a mortgagee clause, including:
- ATIMA – is an acronym for ‘as their interests may appear’, which is designed to include any interested parties that the mortgagee conducts business with; it gives indemnification rights to the mortgagee rather than yourself
- ISAOA – is an acronym for ‘its successors and/or assigns’, meaning it provides the mortgagee the ability to transfer their rights to a different institution or bank, usually in the case of a loss
The following is a sample of an actual mortgagee clause used in some legal mortgage contracts:
“If a mortgagee has an interest in the insured property, any loss payable under Coverage for your Building or Coverage for Other Structures will be paid to the mortgagee and you, as interests appear If more than one mortgagee has an interest in the insured property, the order of payment will be the same as the order of precedence of the mortgages.”
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FAQ
Who Is the Mortgagor and Who Is the Mortgagee?
The mortgagor is the borrower in a mortgage transaction, typically the homeowner who takes out the loan to purchase or refinance a property. The mortgagee is the lender, such as a bank, credit union, or mortgage company, that provides the loan and holds a legal interest in the property as security until the debt is repaid.
A Home Mortgage Is Usually Borrowed for How Long?
A home mortgage is most commonly borrowed for 15 or 30 years, though other terms such as 20-year, 25-year, or adjustable-rate mortgages also exist. The loan term affects monthly payments, interest costs, and how long it takes to fully repay the loan.
What Is a Mortgagee Clause?
A mortgagee clause is a provision in a homeowner’s insurance policy that protects the lender’s financial interest in the property. It ensures that insurance proceeds from a covered loss account for the mortgagee’s interest and may be paid to the lender as well as the homeowner.
What Is a Residential Loan?
A residential loan is a mortgage used to purchase, refinance, or improve a property intended for personal living purposes, such as a single-family home, condominium, or townhouse. These loans differ from commercial loans, which apply to business or income-producing properties.
Is a Mortgage a Debt?
Yes, a mortgage is a form of debt. It is a secured loan, meaning the property itself serves as collateral for repayment. If the borrower fails to repay the debt according to the loan terms, the lender may pursue foreclosure to recover the remaining balance.