What is a mortgagee clause?
Throughout the mortgage process, you’ll notice many of the terms built into your agreement are designed to safeguard your creditor, also known as the mortgagee (you're the mortgagor). Part of each lender’s strategy for avoiding losses on a loan can be through a mortgagee clause, where your lender (the mortgagee) is granted with a few extra protections for their portion of the sales price.
What is a mortgageE clause?
A mortgagee clause protects your lender’s portion of the sales price by enacting a provisional agreement between the lender and a property insurance company. This specific type of clause shields the lender from significant losses in the event that the mortgaged property is damaged or destroyed.
These clauses are usually added as a stipulation of your homeowners insurance policy, a required expense for anyone who accepts a mortgage.
Homeowners insurance provides added security for both you and your lender against property damage or loss of personal belongings. In the event of a fire or natural disaster, this type of coverage would reimburse the homeowner for repairs to the home as well as any documented lost property. This coverage also protects the homeowner from legal liabilities should a property loss, injury or death occur on the land.
Reading through these policies might get a little confusing, so let’s make sure we get a few key terms straight. The “mortgagee” refers to your lender, or whoever is providing the financing to purchase the home. The “mortgagor” conversely, is whoever accepts that financing, or you as a buyer.
Most of the time, these property insurance policies include a mortgagee clause. If the property is damaged or destroyed, this clause obligates the insurance provider to provide payouts as long as the type of damage is covered by the policy.
If your home were to be destroyed in a fire, for example, the mortgagee clause guarantees that those losses are payable to your lender. Additionally, the clause grants continued lender coverage if the policy is voided by uninsured issues, such as neglect or deliberate destruction of the home. In those cases, the buyer would lose their right to any insurance payouts, while the lender can still recoup those losses.
Most commonly, mortgagee clauses are utilized following a foreclosure. If a buyer were to completely stop making their monthly mortgage payments, the lender would have the right to resell the home and make back their original loan.
However, if the property is foreclosed on and it is later discovered to be damaged in some way, the previous owner would no longer have a claim to the insurance payout. In this case, those payments would be directed to the lender so they can complete the necessary repairs before putting the property back up for sale.
Benefits of a mortgagee clause
While it might not seem like you get much from this stipulation, the mortgagee provision in your insurance policy significantly reduces the risk associated with financing a home purchase. Without this security, lenders wouldn’t be able to issue loans large enough for home purchases. By allowing a built in contingency plan, this clause lets your lender issue more loans with the confidence that their money is secure.
Loss payee vs. mortgagee clause
Most of the time, the loss payee and mortgagee both refer to the same party: your lender. Simply put, the loss payee is the individual or entity who the insurance company pays for damages in the event of a loss.
When filing with your insurance company, you’ll fill in the “loss payee” section with your lender’s information, such as the name, address and loan number for your mortgage. If you were to stop making insurance payments, the loss payee (your lender) would be notified and given the option to force-place a new policy with a different provider. The cost of this new policy would then be folded into your monthly mortgage payments.
What are the components of a mortgagee clause?
While the basics of a mortgagee clause might be a little more clear, there are still a few terms you'll find in the clause that could cause some confusion. Let's take a look at each of these components and how they related back to your lender:
- Lender protections
- ISAOA
- ATIMA
Lender protections in mortgagee clauses
As discussed earlier, the main purpose of a mortgagee clause is to provide a protective provision that helps ensure a return on your lender’s investment if the home is severely damaged or destroyed. Without this clause, your lender, or mortgagee, would incur significant losses by taking the full weight of a failed loan.
Thanks to these protections, lenders can operate with less risk and continue to provide financing for those looking to buy a home.
ISAOA
The added protections granted by a mortgagee clause also allows lenders to operate in the secondary mortgage market. ISAOA, or “its successors and/or assigns,” extends these protections to a separate institution should they decide to buy the loan.
ATIMA
Standing for “as their interests may appear,” ATIMA is another common component of mortgagee clauses. This stipulation once again extends the insurance policy’s coverage to any associated parties who would incur losses if a particular property was damaged or destroyed.
In conclusion
When you purchase a property, you aren’t the only one taking on risk. Your lender will want to make sure the money they’ve lent is safe and their collateral is protected.
As the buyer, it might not seem like the most important part of buying a home. However, without the mortgagee clause in place, applying for a mortgage might not even be possible. For a full-scope understanding of the mortgagee clause and how it applies to your loan specifically, be sure to speak to your loan officer or insurance agent.
