Take your pick: water is pouring through your ceiling like Niagara Falls, your kitchen looks like the dying embers from last night’s campfire, or your roof looks like it has been sitting on a driving range instead of the top of your house. If anything of that sort is happening to you, contacting your mortgage company is probably the last thing an average home owner is worried about is however, its likely required. Not only that, your mortgage company likely has a right to participate in the insurance claim and repair process, hold and disburse insurance proceeds, and inspect the work as it progresses through completion. For these reasons, it is important for policyholders to also know what their mortgage requires after a loss.
To better understand what your mortgage company requires, start with a review your mortgage or deed of trust (also commonly referred to as the “security instrument”). In that document, you will find requirements establishing the nature of your mortgage company’s expectations. For example, in the Colorado, Fannie Mae requires the following from homeowners in the event of a loss:1
- You must give prompt notice to the insurance carrier and your Lender. Prompt notice is always required. As soon as you have any reason to believe your property may be damaged by a covered loss, call your insurance company and mortgage company for next steps.
- Provide a Proof of Loss (if so required) to your insurance company, otherwise your Mortgage Company could send your insurance company its own Proof of Loss. A Proof of Loss is a valuation of the damage and may be required by your insurance carrier. Your mortgage company has a vested interest in your home too. If you sit on your rights, your mortgage company may choose to act in your place.
- Outside of a separate agreement in writing with your Lender, the insurance proceeds, shall be applied to restore or repair of your property, if the restoration or repair is economically feasible and Lender’s security is not lessened.
- While you are making repairs to your home, your Lender has the right to hold your insurance proceeds until after they have inspected your property and are satisfied that the work is completed. In most cases, your check for insurance proceeds will include your name and your mortgage company’s name (possibly your contractor’s name as well, but we can save that part for another time). So, you will have to present the check to your mortgage company and it will hold all or portions of your money until the work is completed. Typically, your mortgage company will only hold insurance proceeds exceeding $10,000.00, but mortgage requirements vary.
- Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. Again, for insurance proceeds below $10,000.00, your mortgage company will likely make a lump sum disbursement of the entire amount.
- Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds. So, unless state law requires it, while your mortgage company holds your insurance proceeds, if your funds are held in an interest-bearing account, it can keep that interest.
- Fees for public adjusters, or other third parties are your obligation and cannot be paid as part of your insurance claim proceeds.
- If the restoration or repair is not economically feasible or Lender’s security would be lessened by making the restoration or repair, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower. While it is not likely, your Deed of Trust could grant your mortgage company the right to apply your insurance proceeds to your mortgage loan balances instead of going to repairs for your home.
Failure to understand and abide by the requirements of your mortgage can lead to unwanted financial consequences, so for homeowners, familiarity with those requirements is important both before and after a loss. By ensuring proper understanding of the insurance claim requirements in your mortgage contract and maintaining necessary communication with your mortgage company during an insurance loss, you can avoid at least a few unanticipated payment and repair headaches.
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1Colorado–Single Family–Fannie Mae/Freddie Mac Uniform Instrument, Form 3006