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What’s a protection mortgage clause and is it important?
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When applying for a mortgage loan, you need to ask important questions like “what is a mortgagee clause?” so you don’t agree with terms that do not fully meet your needs. Many homeowners, especially new ones, have no clue what a mortgage protection clause is and the financial interest earned from their homes.
Before starting the process of getting a mortgage, you probably familiarized yourself with the extensive process. Still, you may not have taken the time to learn about the precautions lenders take to ensure they do not make too big of a loss with your mortgage.
A mortgage protection clause is one of those precautions that lenders take.
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Definition of a mortgage clause
Within a property insurance policy, there is a provision covering the lender (the mortgagee) from experiencing a significant loss on their investment, which is your property mortgage loan.
That provision is a mortgage protection clause. The clause states that if physical damage or any other form of loss happens to the borrower’s property, the insurance provider will pay the lender, or the mortgagee, for the loss.
The mortgagee may even receive payment from the insurance provider if the borrower were to stop making monthly payments or default on their loan to the point of foreclosure.
They can receive compensation if they discover the property is damaged after acquiring the foreclosed property The clause states that the payment will be made even if the borrower was at fault for the damage or loss of the property.
Read more: What is remortgage?
The point of a mortgage clause
One can assume that the mortgage clause is why most lenders require new borrowers to purchase a home insurance policy. This clause may even be needed within a home addition loan to ensure full payment is received after renovation.
The mortgage clause is included within a home insurance policy to protect the house and the lender during a real estate transaction. The clause ultimately is a form of protection for the lender if damage to the property or the default of the loan causes a lender’s loss.
When it comes to the payment that a mortgage clause promises to send out, the lender (mortgagee) is the only recipient of the funds. Damages, including arson and other physical impairments, are covered by the mortgage clause.
Factors within a mortgage clause
Though most of the benefits of a mortgage clause revolve around protecting the mortgage lender if the property were to become damaged, other components play a role as well. Here are the different factors that are a part of a standard mortgage clause:
- Lender protections: As mentioned before, this component of the mortgage clause is the portion that protects mortgage lenders. Instead of paying damages and any loss out of pocket, they are covered by the insurance company that carries the home insurance policy.
- ATIMA: Another portion of the clause is ATIMA, which stands for “as their interests may appear.” When this acronym is present, another party outside of the lender is covered by the insurance policy. It is basically an extension (or an “add-on”) of the general insurance policy.
- ISAOA: This acronym stands for “its successors and/or assigns.” It gives the mortgagee the ability to transfer their rights to another mortgage lender. This lender can be another bank or institution. It allows the lender to sell the borrower’s loan on the secondary mortgage market. The reason mortgage lenders may sell the loan on the secondary mortgage market is to save up revenue for future loans with potential clients, or to avoid going through a process of foreclosure if they predict a current borrower may forfeit their loan agreement.
Other types of mortgage clauses
Though the term “mortgage clause” is used to describe the mortgage clause in property insurance for most cases, there are other references when using this term.
An “alienation clause” is another type of mortgage clause included as part of your mortgage.
This clause may also be known as a “due-on-sale” clause and requires the borrower to make full payment of the mortgage if they sell or transfer the property. It prevents a new owner from assuming the mortgage’s current terms without the lender’s knowledge.
A “due-on-sale” clause does not allow borrowers to transfer their mortgage to a new borrower unless the potential new homeowner is applying for a mortgage loan with the lender.
The only exception to this is if the potential buyer is paying with cash and has no intention of assuming responsibility for the current homeowner’s mortgage agreement.
Read more: Defeasance clause
How to get a mortgage clause
The homeowner’s insurance company needs the mortgage clause information to notate who has the lien within the policy. However, the borrower typically does not have to worry about providing this information.
The mortgage lender offers this information to the insurer, but if you are asked for this information, then you should contact your lender or broker and tell them who needs those details.
Read more: Mortgage broker vs loan officer
Why a mortgage clause is important
No matter the type of home loan that is right for you, having a mortgage clause in your mortgage loan is essential. The clause notates who is legally indebted to financial reimbursement should a property lose its value after physical damage or having a borrower default a loan.
Purchasing mortgage insurance with a mortgage clause in the policy is a must because it protects the lender’s financial interest in the property.
Should irreparable damage happen to your purchased property, like a fire, the insurance company pays all money owed to the lender based on their financial interest. This actually protects you from having to pay any money owed out of pocket.
As mentioned earlier, the mortgage clause is usually required when you first purchase a home or when you switch from one homeowner’s insurance provider to another. The insurance company needs this record to notate who has a financial interest in the property. This makes sending out a payout if there is a loss easier when money is owed.
Read more: Tips for spending less on homeowners insurance
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