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Fire, Water and Repair-Heavy HousesBy Anthony Grynchal10 min read

Insurance Proceeds and the Mortgage Lender: Questions to Ask

Why a claim check names your lender, how servicers hold and release repair money, and what to ask in writing before you sell a damaged house.

Empty living room in Rancho Cucamonga with white walls, a fireplace with a white mantel and raised hearth, two windows with blinds, and light wood-look flooring meeting tile

If your house has a mortgage, the insurance money for repairing the structure will usually be paid to you and your lender together, because the loan documents and the policy give the lender a stake in it as mortgagee. The lender, through the company that services the loan, generally endorses the check, holds the money and releases it as repairs are done. If you are thinking of selling instead of repairing, ask your servicer in writing what happens to money it holds and money still to come, before you sign anything; the answer depends on your loan, your policy and the servicer's rules.

This article is part of the fire, water and repair-heavy houses section. It covers the lender's side of a claim. How a claim and a sale fit together, and the questions for the insurer, are in selling a house with an open insurance claim; the rebuild-or-sell math is in rebuild first or sell now.

Mr. Cali Offers does not advise on insurance or loans. Everything below describes how the pieces usually fit, so you can ask the right people: your servicer, your insurer, a licensed public adjuster or an attorney.

Why the lender's name is on the check

Two layers of rules put it there. The first is the insurance policy. California's standard form fire policy, set out in Insurance Code section 2071, addresses loss "made payable, in whole or in part, to a designated mortgagee." It gives that mortgagee its own rights: the insurer must give it written notice before cancelling its interest, and if the owner fails to file a proof of loss, the mortgagee, once notified, must file one itself.

The second is the deed of trust. Civil Code section 2924.7 makes enforceable the clauses that let a lender receive and control the disbursement of fire, flood or other hazard insurance proceeds, whether or not the damage actually impaired the lender's security.

The California Department of Insurance describes the result in plain words: if your home is mortgaged, "the check for home repairs will generally be made out to you and the mortgage lender," the lender "will have to endorse the check," lenders "generally put the money in an escrow account," and the mortgage company "may want to inspect the finished job before releasing the funds for final payment."

Lender, servicer, owner of the loan: who you actually talk to

The company you pay each month is the servicer. It may not own the loan; it often services it for an investor such as Fannie Mae, whose rules then shape what the servicer may do with claim money. Servicing can also change hands in the middle of a repair.

California has a rule for that situation after a proclaimed emergency. Civil Code section 2968 requires a servicer that transfers a loan on property inside an emergency area to deliver to the new servicer its material written records of the borrower's choice to use insurance proceeds to repair or replace the house, and it bars the new servicer from dishonoring a written repair agreement made before the transfer and approved by the owner of the note. If your servicer changes after a fire, keep copies of every agreement yourself.

How a servicer usually releases the money

Each loan owner sets its own procedure, so ask for yours. Fannie Mae's Servicing Guide, section B-5-01 on insured loss events, is a published example of what that procedure looks like:

  • Proceeds not released to the borrower are held in a custodial account for the borrower's benefit, earning interest comparable to a savings or money market account; the interest generally goes to the borrower once repairs are done.
  • For a loan that is current, the servicer may make an initial release and pay the rest as inspections confirm the repair progress, after reviewing and approving the repair plan and bids. Remote inspections using photos or video are allowed when the guide's conditions are met.
  • For a loan that is behind, the servicer must also evaluate the borrower for a workout option, releases are smaller and more staged, and a final inspection is required.
  • If the house cannot legally be rebuilt, the guide has the servicer apply the proceeds to reduce the mortgage debt.
  • If the borrower does not intend to repair, the servicer must report it to Fannie Mae and the case is handled under the guide's rules from there.

Your loan may be owned by someone else entirely, with different rules. The point of the example is the shape: held money, staged releases, inspections, and different treatment depending on whether payments are current and whether you repair.

The questions to ask your servicer, in writing

  • Who owns my loan, and which department handles insurance loss drafts?
  • How much claim money are you holding now, in what kind of account, and does it earn interest?
  • What is your release schedule, and what inspections do you require at each stage?
  • If I sell before repairing, will you apply the held money to the payoff at closing, release it to me, or something else?
  • Please send a written payoff statement as of my intended closing date, showing any held insurance money separately.
  • If more structure payments arrive after the loan is paid off, will you still need to endorse them?
  • Does it change anything that the house is vacant, or that I am behind on payments?
  • If my loan is transferred to another servicer, what records of our repair agreement will go with it?

How to ask for and read a payoff statement is covered in payoff statements and reinstatement figures. If you are behind, a HUD-approved housing counselor can help you talk with the servicer.

Insurer questions that change the lender conversation

What the servicer will hold depends on what the insurer pays and when. Three California rules decide much of that.

Replacement cost paid after the work. Under Insurance Code section 2051.5, when a policy requires the work to be done before full replacement cost is paid, the insurer pays actual cash value first and the rest once the house is repaired or rebuilt. The time allowed to collect that difference is at least 12 months from the first actual cash value payment, or at least 36 months for a loss tied to a declared state of emergency, with extensions for delays beyond your control. On a sale before repairs, ask the insurer whether any of that later money is still available to you.

Rebuilding elsewhere after a total loss. The same section says a policy cannot deny replacement cost only because you rebuild at a new location or buy an already built home, capped at what rebuilding at the original location would cost. That can matter if you plan to sell the lot and buy another house.

Emergency losses. Insurance Code section 10103.7 lets an owner with a total loss tied to a state of emergency combine the dwelling and other-structures limits when the dwelling limit is not enough to rebuild, and, when the home was a furnished primary residence, requires the insurer to offer an advance on contents without an itemized inventory, with the right to claim more later.

The Department of Insurance notes that lenders typically require being party to payments "related to the structure," and that you "should also receive a separate check covering your additional living expenses." Ask your insurer which checks will carry the lender's name and which will not.

What a sale does to each kind of money

MoneyUsually payable toAsk before you signAmount

Structure payments already received

You and the lender, often held by the servicer

Applied to the payoff, or released to you?

-

Structure payments not yet issued

You and the lender

Still due after a sale, and to whom?

-

Replacement cost held back until repair

Depends on the policy

Available if you do not repair this house?

-

Additional living expense

Usually you, on a separate check

Does a sale end it, and when?

-

Contents

Usually you

Any advance available, and any limits?

-

Loan payoff

The lender, through escrow

Written payoff showing held funds

-

What reaches you

-

How it shows up in the two numbers

The house is priced as it sits, and the claim money is handled outside the offer, between you, your insurer and your servicer. What changes is the net: if the servicer applies held funds to the payoff, the payoff line at closing is smaller, and escrow should show it that way. That is why the written payoff statement belongs in the file before anyone prices the house.

Repairing and listing usually nets more when the claim covers most of the repair bids, the servicer is releasing money on a schedule the contractors can work with, your payments are current, and the finished house will sell to financed buyers. Selling as it sits may make more sense when the claim is short, the releases are stuck, the house keeps deteriorating while it is empty, or you cannot manage a rebuild. How to compare bids with an offer's repair lines is in repair estimates vs. an offer's deductions.

What this looks like in practice

These are the kinds of files that come in, described without names or figures.

  • A fire-damaged house in Alta Loma, in the foothills of Rancho Cucamonga where parts of the area are mapped fire hazard severity zones, where the servicer is holding the first structure check and the owner wants to know whether it follows a sale.
  • A water-damaged house whose loan was transferred mid-repair, and the new servicer asked for inspections the old one had not required.
  • An inherited house still carrying the late owner's loan and an open claim, covered further in inherited house with an existing mortgage.

Getting both numbers

Bring the claim status, the servicer's letters and a payoff statement if you have one; nothing has to be repaired or cleaned up first. You get an as-is cash offer from independent buyers and investors, with each repair category on its own line, and an open-market read on the house repaired, which is a preliminary estimate, not an appraisal. When repairing and listing nets more, the written recommendation says so, and you are introduced to a designated local expert, an independently licensed California agent. Start on the fire, water and repair-heavy houses page or call (909) 498-3977. There is no cost and no obligation to get the two numbers and the written report.

Sources

Mr. Cali Offers is not a lender, insurance adviser, adjuster or law firm; loan and claim questions belong with your servicer, your insurer and your own advisers. Cash offers come from independent buyers and investors who buy for their own account and may resell for profit; a cash offer is generally below what the open market would bring. Any value shown is a preliminary estimate, not an appraisal. Nothing here is legal, tax or financial advice.

Frequently asked questions

Why is my mortgage company's name on my insurance check?

Because the policy and the deed of trust give the lender an interest in the house as mortgagee. California's standard fire policy provides for loss payable to a designated mortgagee, and Civil Code section 2924.7 makes deed-of-trust clauses enforceable that let the lender receive and control hazard insurance proceeds. The California Department of Insurance says the check for home repairs will generally be made out to you and the lender, and the lender will have to endorse it.

Can my lender keep the insurance money if I sell the house instead of repairing it?

It depends on your loan documents and the rules of whoever owns the loan. Some servicer procedures apply held money to the loan balance or handle it at payoff; Fannie Mae's Servicing Guide, for example, has the servicer reduce the debt when a house cannot legally be rebuilt. Ask your servicer in writing what it will do with held money and future payments if you sell, and get a written payoff statement showing held funds separately, before you sign.

Does the lender get my additional living expense or contents money?

Usually not. The California Department of Insurance says lenders typically require being a party to payments related to the structure, and that you should receive a separate check for additional living expenses. Contents payments are generally yours. Confirm with your insurer which checks will carry the lender's name.

What happens to my repair agreement if my loan is transferred to a new servicer?

For property inside a proclaimed emergency area, California Civil Code section 2968 requires the old servicer to pass on its written records of your choice to use insurance proceeds to repair or replace the house, and bars the new servicer from dishonoring a written repair agreement made before the transfer and approved by the owner of the note. Keep your own copies of every agreement in any case.

Written by

Anthony Grynchal

Anthony Grynchal is a California real estate salesperson with eXp Realty, licensed since November 2009 (CA DRE #01873626), and the owner of Mr. Cali Offers.

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