Your lender probably knows you're a decent, hard-working person, but that doesn't mean it is comfortable granting you an unsecured loan. If you lose your house, the lender no longer has collateral. For this reason, it requires you to add a loss payee clause to your homeowners insurance as added protection.
Insurance is a crucial requirement on a mortgage loan. When you get approved, contact your insurance company and add the lender as loss payee. This typically appears as the lender's name and address on the policy. Instruct the insurance company to forward the policy declaration page to the lender as proof of insurance. If you have an escrow account for homeowners insurance premiums, your lender will send payment directly to the insurer and get a copy at each renewal. If you won't have an escrow account, you must make sure the mortgage company gets a copy each year.
Amount of Coverage
The lender will require you to have enough coverage to provide protection in the event of a loss. In most cases, the property will be worth more than the loan amount. While it's certainly in your best interests to cover the value of your home, the lender only requires you carry the loan amount in coverage. This will ensure it gets reimbursed under the loss payee clause for the money it's put out. If, for some reason, the loan amount is more than the value of the home, you must have enough insurance to cover the replacement cost on the property. The replacement cost is the amount it would take to rebuild the house from scratch.
Successors and Assigns
Most lenders require the loss payee clause to include the phrase "its successors and/or assigns," often abbreviated as ISAOA. This is common for lenders that sell loans to other companies. It means that any bank that purchases your loan will be covered under your policy. In the event your lender is acquired by another institution, the insurance policy will also continue to provide coverage to the purchaser.
Reimbursement as Loss Payee
When damage occurs to your property, the loss payee clause gets your lender paid first. When you file a claim that's approved, the insurance company will cut a check payable to both you and the lender. You will endorse the check and present it to the mortgage holder. The lender will inspect the property and make sure the damage and subsequent repairs match the claim. Once satisfied, the lender will endorse the check and disburse the funds to you.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.