Homeowners with mortgages, something to be aware of with homeowner’s insurance

by
Oct 27, 2002


The Bottom Line Insurance, mortgages and losses that you may have can be a headache. Know what to expect, make this time easier for yourself.

If you own a home and you hold a mortgage, hopefully you have never had to deal with homeowner’s insurance claims for damages. If you have not, this article is written to help you with some details that will make this whole experience less stressful because you will know what to expect. This is in case you ever have to deal with this in your lifetime.

No one wishes to experience a loss on their home, but we carry homeowners insurance, just in case. If you have a mortgage, I have some information that may make the loss and claim period a little less stressful.

I work in the mortgage industry. I can tell you from my experiences dealing with homeowners, when losses happen to your home, you will experience a lot of stress. Some of the stress is due to the type of loss and the amount of damage. But, I feel that the biggest reason people are so stressed is due to the unknown.

Fortunately, for most of us, we do not have to deal with insurance claims and this type of loss. Due to this, this is unexplored territory and it is something new that we have to deal with. Something new and unknown, especially in the time of a personal tragedy, can make things unbearable and put a tremendous amount of stress on your plate.

What do I do if I have a claim for damage on my home? Where do I go first? What happens when I receive my check for damage?

I hope to answer some of these questions for you, so that if you ever have to deal with this, you will be a little better prepared and you will know just what could happen. The information that I will provide can and will be slightly different, depending on the type of loan you carry on your home, who services your mortgage loan, and the amount of damage, or loss, that you experience.

First Step

If you have a loss due to storm damage or fire, or any other type of damage, you need to contact your insurance agent immediately. I am surprised by the number of people that believe they have to call the servicer of the mortgage first. I can see why most people believe this, because a lot of homeowners have their insurance escrowed and the servicer pays the insurance renewal on their behalf every year.

This is not the case. You need to contact your homeowner insurance company or your agent that represents you to tell them about the damage. They will ask you whatever questions they have to, and probably will send out a claims adjustor to investigate the damage and figure out how much you should receive to fix and repair the damage.

Your agent should be able to provide information regarding the length of time it might take to get the check for the damage and about any expectations that the insurance company has for getting the damages repaired. The insurance company might have specific contractors that you have to work with. One thing to check on, verify whether or not your agent has to review the repairs once the work has been completed.

Next Step

This step depends on you, depending on what you wish to do next. If you know what type of repairs you need, you can contact contractors to set up appointments to get estimates and to find out when they could do the repairs.

If you do not know contractors, and feel overwhelmed by the yellow pages, check with your insurance agent, the local better business bureau, co-workers, family, or neighbors. Talk with these people to see whom they would recommend. This is a terrific way to find a good contractor, or to avoid a contractor that someone has had a bad experience with.

If you know an estimate of the damage from your insurance claims adjustor, you should be able to have an idea of the extent of the damage, and how much the insurance is going to pay. If you start lining up the estimates now, you will be able to find out how much you will have to pay out of pocket to the contractor.

One thing to keep in mind, most contractors want paid when the work is completed. Make sure you do not schedule the repairs unless you can guarantee when you will have the check from your insurance company. This brings up the next, very important piece in dealing with the repairs and your mortgage servicer.

Before the work begins

Please make a note of this section. This is information that the homeowner does not know, but is a very important part in the insurance loss and getting paid for the damages from your insurance company.

Any companies that hold a mortgage against your home, has a vested interest in any damages and repairs. This includes any and all liens against the property, whether you have one or four liens. All of these lien holders will have a “say” so to speak in the loss and the payment that you receive from your insurance company to repair the damage to your home.

The mortgagees (loan servicers or banks that hold the mortgages) have a strong desire to ensure that the home is able to be sold, if in the event you ever stop making your mortgage payments. If for some reason they had to foreclose on the property, the mortgage holders will have a home that can be sold outright without a lot of repair work. This will save the bank and any loan servicers from losing a lot of money.

Having said this, your insurance company will issue a check that is payable to you and any lien holders that you have on your property. Before you can cash the check for the loss or damage on the home and pay for supplies or contractors, you will have to send the check to the appropriate company to get their endorsement.

This can be a tricky thing, depending on the amount of the damage, or loss, and the amount of the check. The more liens you have against the property, the more signatures you will have to have to get in order to get the check cashed.

Also, every company that holds a lien against the property may have different requirements.

How to get the check signed and cashed

As mentioned above, depending on the amount of the damage sustained on the house, you might have a very short turnaround time in getting the signatures for the loss or it could be lengthy. Just for the sake of this review, we will assume that you hold one mortgage against the property.

Every mortgage holder, or servicer, works with the investors guidelines about how loss drafts are to be handled. (Loss drafts are the checks issued by the insurance company for the loss that you had on your home.) The main investors tell companies the basic requirements of how losses should be handled, and they are consistent throughout the industry. But, there could be variations in the handling, depending on the servicer. The main investors for mortgages are as follows: Freddie Mac, Fannie Mae, or Ginnie Mae.

If the loss was fairly small, say under $10,000, you will probably just have to send the unendorsed check to the loan servicer. They will sign off on this and return the check to you. Once you have the endorsed check, you sign off on this and deposit it in your bank and proceed in paying the contractor(s) as needed.

If the loss was moderate, say between $10,000 - $50,000, you will probably need to provide the insurance estimates and the unendorsed check to the mortgage servicer and they will endorse it over and mail it back to you.

Now, if the loss becomes more substantial, say between $50,000 - $100,000, you will probably have to sign over the check, mail it to the servicer along with copies of the insurance estimates and the contractors bid showing how much they are charging for what work they will do. Usually, if the check is under $100,000, you will probably get the entire amount sent back to you.

But, if the loss exceeds $100,000, you will have to submit all of the information listed immediately above in the preceding paragraph, and the mortgage servicer will have to decide how the funds will be disbursed back to you and the contractor.

Most times, if the loss is around $100,000, you will receive two payments. The initial check is usually mailed right away. But, you will probably have to have an inspection done by the loan servicer before the last of the funds are released to you and the contractor. This ensures that the work is nearing completion and done correctly, so it does not take away from the home’s value.

If the loss is much higher, you may be on the thirds plan. You will get about 1/3 of the total check issued up front. You will probably have to contact the servicers to have an inspection done when the work is roughly 50% completed. Then, once the inspection has been completed, you will have another 1/3 of the total check will be issued to you and the contractor. When the work is nearing completion, say roughly 90%, you will need to contact your loan servicer again, and they have another inspection ordered to confirm the work is nearly completed. Then, the servicer will issue the remaining 1/3 of the insurance loss to you.

Final Thoughts

Insurance losses are a difficult time, no matter what. Hopefully, the information presented above will help homeowners be aware of situations they may face if this were to ever happen. (Hopefully, you never have to experience this, but just in case.)

The information presented above is not a guarantee of the way all companies handle insurance losses or claim checks. This is just an example of what you could expect if you have to deal with a mortgage servicer in the event of an insurance loss.

Thanks for spending time with me today!

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