There is a lot to consider when you buy a new home. One of the subjects you may not be familiar with is what rights your mortgage lender has if you need to make a fire insurance claim.
First of all, your mortgage lender may, and probably will require you to get home insurance so that they know the value of the house is protected even in the event of a major loss. Not only will they require insurance, but they may also require that you obtain certain types of coverage. Whether you are buying a new home or you need to learn more about the home insurance claim process after a loss, it's important to understand the rights your mortgage lender has and what role they may play.
Mortgage Lenders Have a Financial Stake in Your Home
If you are making mortgage payments, you do not fully own your home. The bank or mortgage lender has an interest in that asset, and insurance policies protect both the lender and the homeowner.
Before getting insurance, having a home inspection done can make sure that you receive accurate coverage, protecting you from having to pay out of pocket for unexpected expenses. Certain issues may lead to higher premiums, including:
An aging roof;
Out-of-date electrical wiring;
A wood-burning fireplace; or
Being in a flood zone.
Those risks and others may bring higher premiums because the risks of damage or loss are higher. Without this coverage, a loss could prove devastating for the homeowner.
Your Mortgage Lender Could Be Co-Payable on Insurance Claims
In addition to requiring homeowners that get specific coverage, your mortgage lender may also be co-payable on your insurance claim. What does this mean?
You've successfully filed a fire insurance claim and your insurer has agreed to fair compensation that covers your costs. You receive a check and see that your mortgage lenders name is on it as a co-payee. There are a few scenarios that can follow where one or both parties endorse the cheque over to one another or to the contractor. Once you endorse the check over to your mortgage lender, they can discharge your obligation on the loan by depositing the proceeds and applying them up to the limit of what you still owe on your mortgage. If this occurs, you may have to apply for a new mortgage to get the funding necessary to pay the contractor.
Getting Your Mortgage Lender to Release Funds
If your mortgage lender does not discharge your loan, and instead agrees to release the funds to the contractor, they still have a few options about how to do so. You will need the insurance funds to get started rebuilding your home, but your mortgage lender may be reluctant to release the funds all at once. This reluctance might come from not wanting to risk that the homeowner could walk away with the money and default on their mortgage.
Many mortgage lenders avoid this risk by choosing to release periodical payments as contractors make progress on the work. For example, they may release 1/3 of the money at the start of the process, 1/3 at 50% completion, and the final 1/3 when completion has been verified.
Another option mortgage lenders have is making both the homeowner and the builder co-payable to avoid delays.
Your mortgagor is only co-payable on funds that cover the Structure that they have an interest in, not for payments on coverage for Contents and Loss of Use. Your insurer will pay those funds directly to you.
Understanding your mortgage lender's rights in a fire insurance claim can help you avoid confusion and know what to expect.
