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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Mortgagee Clause
When you apply for a mortgage to buy a new home or refinance your current mortgage the lender will require you to take homeowners insurance.
This is to ensure that both borrower and lender are covered in case the mortgaged property is damaged.
The homeowner’s insurance is in the name of the homeowner, but how does the insurance company know about the lender who has to be covered?
That is when the mortgagee clause comes into the picture. In this post, we will understand what is mortgagee clause in detail.
What Is A Mortgagee Clause?
A mortgagee clause is a preliminary protection agreement between a mortgage lender (mortgagee) and a home insurance company.
This type of clause protects the lender from financial loss in the event of damage to the mortgaged property because it requires the insurer to guarantee payment when the claim is made under the insurance policy.
This type of clause t is also called a loss payee clause or mortgage clause.
How Does Mortgagee Clause Work?
The mortgage clause is important because it determines who is legally entitled to receive financial compensation if the property is damaged as a result of the loss.
When you get a mortgage, you need to buy insurance to protect the lender’s financial interests in the property, which is also known as the loss payee.
In case the property is damaged due to any reason like fire or flood, the insurance company will make sure the loan is paid to satisfy the lender’s financial interests.
The homeowner’s insurance company would ask you to provide this clause when you are refinancing your mortgage with a different lender or buying, a new home, or changing the insurance company.
The amount of insurance required to cover the damages will be suggested by the lender according to their requirements.
When there is a change in the mortgage lender or the insurance company it is very important to let the new insurance company know who has the financial interest in the property.
What Information Is Included In A Mortgagee Clause?
Now that you understand the basics of this type of clause, there are still a few terms in the clause that could be challenging to comprehend.
To help you understand, let’s look at three specific terms. Let’s first see what this clause looks like with the help of an example.
XYZ Mortgage Company,
ISAOA/ATIMA
PO BOX 112233
Houston, TX 77009
Loan Number: 112233445566
Lender Protection
This clause is used to protect the lender from causing financial loss and taking full responsibility for the failure of a mortgage due to property damage.
Mortgage clause guarantee that the insurance company will pay the lender in case of damage to the property, and that the lender will receive money even if the borrower is liable for property damage.
ISAOA
ISAOA stands for “its successor and/or assigns” and is part of this clause. This provision states that the mortgage lender can transfer its rights to another financial institution or bank.
The ability to transfer these rights to another party allows the mortgages to be sold by original lenders to mortgage lenders in the secondary mortgage market.
Mortgage lenders typically sell borrowers’ loans to secure funds for future loans. However, this practice has little or no impact on borrowers.
Lenders can still have the right to serve, even after the mortgage is being sold in the secondary market.
This means you can send your monthly payments to the original lender who is responsible to maintain your escrow account and assist you with any query about your loan.
ATIMA
Another common abbreviation that can be used in mortgagee clauses along with ISAOA is ATIMA. ATIMA stands for “as their interest may appear.”
The term is used to extend coverage that covers the third parties that the lenders do business with. Its meaning is very similar to ISAOA, as it will help the lender to cover for other parties without naming them individually.
Conclusion
The mortgagee clause is one of the most important parts of the mortgage process when you apply for a mortgage to buy a new home, refinance your mortgage with a different lender, or change your insurance company.
The lender would require you to update the mortgagee clause with your current insurance company to ensure that their interest in the property is always protected.
