What is a mortgagee clause?
An important part of the mortgage approval process
When you are finalizing the paperwork to buy or refinance a home, you will often be asked by your lender to sign documents related to the "mortgagee clause." The language on these documents can look complicated, but the purpose of the mortgagee clause is fairly simple to understand. Read on to learn more.
What is a mortgagee?
A "mortgagee" is another name for a mortgage lender, which is the bank or financial institution that gives you a mortgage to buy or refinance a house. You might also see on these documents the term "mortgagor" which is another name for the borrower or borrowers on the loan. The mortgagor is you and anyone who might be on the loan with you.
What does a mortgagee clause do?
The mortgagee clause gives the insurance company that holds your homeowners insurance policy the right to pay your lender under certain circumstances.
For example, let's say you buy a house for $250,000 with a $50,000 down payment and a $200,000 mortgage, and you buy a homeowners insurance policy with $250,000 worth of coverage on the house. Then, let's imagine that an accidental fire burns this house to the ground.
The mortgagee clause establishes the right of your insurance company to pay your lender the amount of your current mortgage principal balance. In this case, the insurance company might give your lender $200,000 to pay off the mortgage debt owed and pay you $50,000, which represents the value of the equity you have in the home.
The mortgagee clause typically establishes the right of lenders who might buy your mortgage later to be named in the place of your original lender. It protects the lender from certain actions which might void the homeowners insurance policy (such as the homeowner deliberately burning down the house). Finally, the mortgagee clause usually defines certain obligations your lender has to the insurance company as a result of the agreement.
Can you refuse to have a mortgagee clause?
Lenders are unlikely to approve your mortgage application or help you finance a home if you do not have the mortgagee clause. In most cases, the mortgagee clause is necessary to finalize your loan.
Do you have questions about a claim check made payable to Freedom Mortgage?
Because of the mortgagee clause, checks from insurance companies are often made payable to Freedom Mortgage. Learn what you need to do to get the money from these checks by reading our article on how to work with our loss draft insurance department.
Last reviewed and updated June 2023 by Freedom Mortgage Corporation.