When you take out a mortgage or move forward with a cash-out refinance in Texas, you’ll likely be asked to agree to certain property insurance provisions, such as a mortgagee clause. This begs the question: What is a mortgagee clause? The knowledgeable team at Champions Mortgage is here to explain everything you need to know about this insurance policy clause.
The Basics of a Mortgagee Clause
Securing a home loan often requires you to take out homeowner’s insurance as well. Although the mortgage will be in your name as the homebuyer, the mortgagee clause deals with your lender and home insurance provider. It’s a form of mortgage lender protection that states the insurance provider must pay the lender for any losses or damage the house sustains during your mortgage term.
Your insurance provider may cover standard losses in your policy but upon signing the lender’s interest clause, you agree to have these losses payable to the lender as part of their mortgagee rights. Keep in mind that this agreement protects the lender in instances when the damage caused is both accidental and intentional. For example, an accidental fire and an act of arson will both result in a lender receiving funds for the losses, despite the latter being an incident that would void your insurance policy.
How Mortgagee Clauses Enhance Home Loan Security
Now that we’ve answered, “What is a mortgagee clause?” it’s time to focus on another crucial question: How do mortgagee clauses boost mortgage lender protection? Check out the key components of this agreement that enhance your home loan security.
It Focuses on a Lender’s Investment
As the homeowner, you’ll have the responsibility of caring for the upkeep and maintenance of your property as well as paying back your loan over several years. Until the loan is paid off in full and you officially own your house, your lender will need to protect their initial investment. Lenders will need to recoup their losses if a borrower can’t pay off the loan by taking actions like:
- Enforcing debt collection on the borrower
- Forcing the home into foreclosure
- Selling the foreclosed home
A mortgagee clause serves as another way for lenders to recoup their losses. Say that powerful storms destroy a house. The homeowner’s insurance policy could cover the cost of damage and restore the structure but the provider would also pay that amount to the mortgagee to prevent them from potentially losing money in the sale of a damaged home.
It Provides a Financial Safety Net for Damaged Houses
What is a mortgagee clause’s purpose if the lender requires the borrower to take out home insurance? Comprehensive insurance policies cover a wide range of issues but certain incidents may void the insurance. If a homeowner decides to default on their loan as a result, the lender will be stuck selling the now-damaged house at a lesser value.
By having insurance providers pay them in any instance under a mortgagee clause, lenders don’t have to lose money on damaged homes. They can take the payout and move forward without any financial loss. This ensures they don’t lose their investment if the homeowner can no longer make mortgage payments due to a lack of insurance when fixing up the home.
Connect With Texas Lending Experts at Champions Mortgage
Finalizing the mortgage loan process requires you to ask your lender questions like, “What is a mortgagee clause?” The team at Champions Mortgage and guide you through the complex process so you can purchase a home without any confusion over your mortgage. Reach out to us at (281) 727-2500 to speak with a lending specialist about your home loan needs. Learn more today.
