Mortgagee Clause: Definition, How It Works, and Importance
- Emily Sterling
- 2 days ago
- 2 min read
If you've ever taken out a mortgage, chances are your lender asked for proof of homeowners insurance with something called a mortgagee clause included. But what exactly is that, and why does it matter?
In this post, we’ll break down what a mortgagee clause is, how it protects your lender, and what it means for you as a homeowner or real estate investor.
What Is a Mortgagee Clause?
A mortgagee clause is a provision in a homeowners insurance policy that ensures the lender (the mortgagee) is listed as a beneficiary of the policy. In the event of damage to the home, the lender is entitled to receive insurance payouts to protect their financial interest often before the homeowner sees a penny.
This clause is standard in most residential mortgage agreements and is a non-negotiable requirement when financing a home purchase. If you fail to include it, your lender may reject your insurance policy or even delay the closing.
How It Works
Let’s say a house you financed burns down in a fire. The insurance company won’t just hand over the check to the homeowner. Thanks to the mortgagee clause, the lender is listed on the policy and typically receives part or all of the insurance payout first.
Depending on the agreement, the lender might:
Use the funds to pay down the mortgage balance
Hold the money in escrow and release it for approved repair work
Apply it to outstanding fees or costs associated with the loan
This ensures the property, which serves as collateral for the loan, is either repaired or the lender is financially compensated.
Why It Matters for Homeowners
While this clause protects the lender, it also impacts you, the homeowner. You must notify your insurer of your lender’s name and make sure the clause is included when you purchase or renew your policy.
Here’s what you need to keep in mind:
No clause, no loan: Most lenders will not approve or fund a mortgage unless this clause is included in the insurance documentation.
Claim checks may be delayed: Since checks often require dual signatures (yours and the lender’s), expect added steps when filing a claim.
Policy updates matter: If you refinance or pay off your mortgage, be sure to update or remove the clause with your insurer.
Final Thoughts
The mortgagee clause may seem like a small line buried in your insurance policy, but it plays a major role in protecting both the lender and the integrity of the real estate transaction. By ensuring the lender gets compensated if the worst happens, it helps keep your loan and your property in good standing.
Always double-check that the clause is properly listed and updated with your insurer. It’s a simple step that could save you major headaches later.
