When it comes to your homeowner insurance, finding affordable home insurance might seem like the biggest challenge. However, recent reports suggest that even the best insurance services might not be able to save you from unexpected costs if your house experiences damage: due to a little-known clause, homeowners may have a difficult time accessing their claim due to their bank.
Most cases seem to start normally enough: a house is damaged by inclement weather, a falling tree, or other accident and the homeowner will submit a claim to their home insurance companies. However, when the homeowner receives the claim check, they will either be unable to cash, deposit or even access the funds. This is due to something called the “Mortgagee Clause”, a common but little-discussed section of a homeowner insurance contract. Under this clause, the bank that holds a homeowner’s mortgage can take control of the claim money by requiring that its representatives review and sign any checks or put the money in an escrow account until the repairs are finished. The factors used to determine whether or not a bank will use the clause vary from company to company.
The Mortgagee Clause is designed to protect a bank’s financial investment in the homeowner’s property and prevent insurance companies from having to pay for repairs twice if the homeowner chooses to abscond with the claim money. However, a number of homeowners have suffered significant losses when the clause was used: without the insurance claim, they were forced to pay for repairs out of pocket, putting them in a delicate financial situation until they could pay for construction or until their bank decided to give them the money. For this reason, Fannie Mae and Freddie Mac recently new guidelines, which state that loans that are are current or less than 31 days delinquent can receive initial disbursement of $40,000 or 10% of the unpaid principal balance, with the rest released after periodic inspections of the repair work. The guidelines also say that homeowners should earn interest on any insurance funds in escrow. However, to prevent unnecessary stress in the event of damage, you should speak with your insurance provider about the various details of your plan. This will hopefully ensure that the affordable home insurance you are paying for or purchasing really will be effective and affordable insurance if something goes wrong.