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What Is A Mortgagee Clause
A mortgagee clause is a type of contractual provision where a mortgage lender is protected from incurring financial losses in case the mortgaged property is damaged.
Typically, the mortgagee clause will require the mortgagor’s insurance company to guarantee that it will pay the lender for a valid claim filed under the property insurance.
Just to make sure that the terminology is clear, the mortgagee essentially refers to the lender and the mortgagor is the borrower.
When lenders accept to grant a loan or mortgage to a borrower, they will generally register a lien against the mortgaged property.
This way, in the event of default, the lender knows that it can seize the borrower’s property to get paid.
However, if the property gets damaged, the lender may be at risk of seeing the collateral property value drop below the value of the loan.
To safeguard against that, mortgage lenders will require a mortgagee clause to ensure they can get the insurance company to pay for any damages to the property.
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Why Is The Mortgagee Clause Important
If you’re looking to borrow money to finance the purchase of a house or a real estate property, you should know what a mortgagee clause is all about.
This clause is found in nearly all mortgage transactions as its protective of the lender.
Lenders will typically accept to finance the purchase of your property to the extent they know they have the property as collateral.
However, if the property is destroyed in a fire or in other ways, the value of the lender’s collateral will be diminished or totally lost.
To ensure that the lender is protected even when the property is destroyed or damaged, the mortgagee clause is included where the lender is guaranteed to receive any insurance coverage payouts.
Without this clause, the lender will either not finance your property or will finance you on stricter terms and conditions.
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How Does The Mortgagee Clause Work
The mortgagee clause is a contractual provision between a mortgage lender and the insurance company where the insurance company agrees to directly pay the lender in the event of property damage or claim.
The objective of this clause is to ensure that the borrower’s insurance company pays directly the lender and not the borrower when there’s a claim payout.
This is an important requirement for the lender as it wants to make sure that the borrower does not get financing for the property, gets the insurance proceeds for property damage, and then fails to rebuild the property.
When the lender receives the insurance payout, it will have the ability to oversee the reconstruction process of the property and set any conditions that it considers appropriate.
If the borrower does not agree to have his or her insurance pay coverages directly to the lender, lenders will generally not finance the property.
The mortgagee clause protects the lender against damages caused to the property that are outside of the borrower’s control, like a natural disaster of some kind, or damages caused directly by the borrower (to the extent they are covered).
If the borrower deliberately damages the property and the insurance company fails to pay for the damages, the mortgage lender will typically include a clause giving it the right to terminate the financing agreement.
In that case, the lender will require the borrower to reimburse all outstanding principal and capital.
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Mortgagee Clause Elements
The mortgagee clause will typically have certain key elements.
Lender’s Rights
The first important element of a mortgagee clause is the borrower agrees that his or her insurance company will directly pay the lender for covered property damages.
To achieve this, the borrower’s insurance company will include the mortgagee clause in the insurance policy to ensure the lender is paid for any property damage claims under the policy.
Another key aspect of the mortgagee clause is the lender’s right to maintain the loan agreement in place and use the insurance proceeds to repair the property or terminate the mortgage agreement.
If the lender chooses to maintain the mortgage, then the insurance proceeds will be used to repair the property.
The borrower will typically do what’s necessary to have the property repaired and the construction workers and contractors will be paid by the lender once they demonstrated that their work has been done.
If the lender terminates the mortgage agreement, then it will provide the borrower a short time period to reimburse the balance of the principle and outstanding interest.
Its Successors And/Or Assigns (ISAOA)
ISAOA is an acronym used to refer to the phrase “its successors and/or assigns”.
This contract language is typically found in a mortgagee clause where the lender is given the right to transfer its rights to another financial institution or lender.
Mortgage lenders have the ability to buy and sell mortgages on the secondary mortgage market to manage risk and obtain the necessary liquidity for their loan operations.
The purchase or sale of the mortgage does not impact the borrower in any way as the new lender acquiring the mortgage will honor the same terms and conditions of the mortgage.
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As Their Interests May Appear (ATIMA)
Another element you may find in a mortgagee clause is the “as their interests may appear” language (or ATIMA).
With this contractual language, the lender includes any insurance coverage related to a property.
The idea is to include the “as their interests may appear” phrase to generally include all insurance coverages without having to name every single policy individually.
Mortgagee Clause Example
Here is an example of a mortgagee clause:
LOSS (IF ANY) UNDER THIS POLICY, ON BUILDINGS ONLY, SHALL BE PAYABLE TO THE MORTGAGEE(S), IF NAMED AS PAYEE(S) ON THE FIRST PAGE OF THIS POLICY, AS MORTGAGEE(S) UNDER ANY PRESENT OR FUTURE MORTGAGE UPON THE PROPERTY DESCRIBED IN AND COVERED BY THIS POLICY, AS INTEREST MAY APPEAR, AND IN ORDER OF PRECEDENCE OF SAID MORTGAGES. (A) THE TERMS “MORTGAGE”, “MORTGAGEE” AND “MORTGAGOR” WHEREVER USED IN THIS RIDER SHALL BE DEEMED TO INCLUDE DEEDS OF TRUST AND THE RESPECTIVE PARTIES THERETO. (B) THIS INSURANCE, AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN, SHALL NOT BE INVALIDATED BY ANY ACT OR NEGLECT OF THE MORTGAGOR OR OWNER OF THE DESCRIBED PROPERTY, NOR BY THE USE OF THE PREMISES FOR PURPOSES MORE HAZARDOUS THAN ARE PERMITTED BY THIS POLICY. (C) ANY MORTGAGEE WHO SHALL HAVE OR ACQUIRE KNOWLEDGE THAT THE PREMISES ARE BEING USED FOR PURPOSES MORE HAZARDOUS THAN ARE PERMITTED BY THIS POLICY OR THAT THE PREMISES HAVE BEEN VACANT OR UNOCCUPIED BEYOND THE PERIOD PERMITTED BY THIS POLICY, SHALL FORTHWITH NOTIFY THIS COMPANY THEREOF AND SHALL CAUSE THE CONSENT OF THE COMPANY THERETO TO BE NOTED ON THIS POLICY; AND IN THE EVENT OF FAILURE SO TO DO, ALL RIGHTS OF SUCH MORTGAGEE HEREUNDER SHALL FORTHWITH TERMINATE. (D) IN CASE THE MORTGAGOR OR OWNER SHALL FAIL TO PAY ANY PREMIUM DUE OR TO BECOME DUE UNDER THIS POLICY, THE MORTGAGEE HEREBY COVENANTS AND AGREES TO PAY THE SAME ON DEMAND. THE MORTGAGEE ALSO COVENANTS AND AGREES TO PAY ON DEMAND THE PREMIUM FOR ANY INCREASED HAZARD FOR THE TERM OF THE EXISTENCE THEREOF. (E) THIS COMPANY SHALL NOT BE LIABLE TO THE MORTGAGEE FOR A GREATER PROPORTION OF ANY LOSS THAN THE AMOUNT HEREBY INSURED SHALL BEAR TO THE WHOLE INSURANCE COVERING THE PROPERTY AGAINST THE PERIL INVOLVED, UNDER POLICIES ISSUED TO, HELD BY, OR PAYABLE TO THE MORTGAGEE, WHETHER COLLECTIBLE OR NOT. (F) THE POLICY PROVISIONS RELATING TO “MORTGAGEE INTERESTS AND OBLIGATIONS” ARE SPECIFICALLY REFERRED TO AND MADE A PART OF THIS RIDER
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Mortgagee Clause FAQ
What is mortgagee clause?
A mortgagee clause is a property insurance provision where the insurance company agrees to pay coverage under a policy to the property lender.
This clause typically grants the lender the right to receive insurance payouts, be notified of any policy cancellations, or if the policy is voided in some way.
Where do I find the mortgagee clause?
The mortgagee clause is found in a property insurance policy where the insurance company stipulates that it will pay the mortgage lender for any claims.
The mortgagee clause is an agreement between the mortgage lender (the mortgagee) and the insurance company insurance the mortgaged property.
In this agreement, the insurance company undertakes to pay your mortgage lender for any losses paid out under the policy.
What is the purpose of mortgagee clause?
The main purpose of a mortgagee clause found in property insurance policies is to protect mortgage lenders when the mortgaged property is damaged.
Since the mortgaged property is used as collateral by the lender, damage to the property means the value of the collateral is diminished.
This can expose the lender to greater financial risk.
The mortgagee clause ensures that the insurance company pays any compensation or payouts directly to the lender so the lender is not exposed to financial losses.
Can I refuse a mortgagee clause?
Technically, you have the right to refuse to include a mortgagee clause in your property insurance policy.
However, without this clause, you will likely not be able to have your property financed by a lender.
If you choose not to include this clause in your policy, you’ll need to finance the purchase of the property yourself.
What is a mortgagee vs mortgagor?
A mortgagee refers to a lender, bank, financial institution, or entity helping you finance the purchase of a property.
The mortgagor is the person or entity that is borrowing money and providing the purchased property as collateral to the mortgagee.
If the mortgagor does not pay the principal and interest as per the loan agreement, the mortgagee has the right to foreclose the mortgaged property.
Takeaways
So there you have it folks!
What is a mortgagee clause?
In a nutshell, a “mortgagee clause” is a type of contractual provision that is added to a property insurance policy where the borrower’s insurance company agrees to pay the lender for any claims under the policy.
This provision protects the mortgagee (the lender) from financial losses.
As a result, if the borrower’s property is damaged, the lender will have the assurance that the borrower will continue paying for the property and that the insurance company will pay the insurance payouts directly to it.
Now that you know what is a mortgagee clause and how it works, good luck with your research!
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