Mortgagee Clause: What Is It And How Does It Work?

As you dive into the process of getting a mortgage, you may have a lot of questions swirling when it comes to all the technical parts of a home loan, including interest rates, insurance and the term of a mortgage. It's a good idea to learn everything you possibly can about all aspects of getting a mortgage. That way, you know what to expect when you're going through the process.

The mortgagee clause, a protective measure taken by mortgage lenders, an aspect that’s important to understand. That’s because it might affect your mortgage in the future.

A mortgagee clause, also known as a loss payee or mortgage clause, is a provisional agreement that pops up in home loans. It’s established between a property insurance provider and a mortgage lender (the mortgagee). It protects the lender from experiencing financial losses in situations where the mortgaged property becomes damaged.

Wondering where to find a mortgagee clause? Look in your homeowners insurance policy. More specifically, it’s under the homeowners property policy from the homeowners insurance company. Homeowners insurance, which covers losses and damage to a mortgage borrower's house, usually covers interior damage and personal asset losses as well as injuries that occur on the property.

A mortgagee clause works by asserting that, in the event of loss or damage to a property, an insurance company will pay the mortgagee – not the borrower (also known as the mortgagor). In this case, the mortgagee is considered the loss payee. That is the party that gets the payout first in the event of a loss because it has a financial interest in the property. The clause also works by protecting the lender or financial institution if the borrower ends up damaging the property and the insurance company has to cancel the policy.

Mortgagee Vs. Mortgagor

A mortgagee is a lender and a mortgagor is a borrower. The relationship between the mortgagor and mortgagee can be summed up like this: Once the mortgagor decides on the type of loan they want, the mortgagee decides on the payment structure, interest rate, terms and fees. The mortgagor will then make monthly payments on the loan, but the mortgagee has the right to foreclose on the property if payments cease.

Here's a mortgagee clause example: Let's say a house undergoes structural damage or is a complete loss due to house fire or natural disaster. In this case, the money to repay the damage will come from the insurance company and go directly to the mortgagee, completely bypassing the mortgagor in the process.

Let's look at some specific mortgagee clause terms you may want to know to get the full picture of mortgagee clauses, including lender protections, ISAOA and ATIMA.

Lender Protections

As a component of the mortgagee clause, "lender protections" means that the lender is protected if damage occurs, even if a mortgagor causes the damage.

ISAOA

ISAOA is an acronym that's part of the clause and stands for "its successors and/or assigns.” It means that the mortgagor can transfer rights to another lender. This also allows the mortgagee to sell the loan on the secondary market – through Fannie Mae and Freddie Mac, government-sponsored entities (GSEs). Even if a lender sells your loan, they may keep the servicing rights. In that case, you, the mortgagor, still make payments to them.

ATIMA

ATIMA stands for “as their interests may appear” and is also a component of the mortgagee clause. It’s often used with ISAOA. ATIMA extends the insurance policy to incorporate insurance coverage for other parties that do business with the insured individual, such as subcontractors. However, it doesn't list the types of companies explicitly in the mortgagee clause.

How do you work a mortgagee clause into a contract if it isn’t required by a lender as a part of the mortgage process? You can make sure it's in your contract by reaching out to your lender to ensure that it’s added into the mortgagee contract. You may have to agree to put a mortgagee clause in your contract before you can get approved for a loan.

A mortgagee clause is an important measure of protection taken in a property’s insurance policy. If your property is damaged while you're paying off your mortgage, your insurance company will pay for the loss.

As a mortgagor, you'll need to purchase a homeowners insurance policy as it’s a lender requirement and is part of getting a mortgage. Homeowners insurance protects you, the borrower, and the lender, so it’s mutually beneficial. It includes dwelling coverage (physical damage to the property) and liability coverage (when someone is physically injured on the property). You'll have to buy enough insurance to cover your home if it ever needed to be completely replaced from the ground up.

If you have specific questions about lender protections and other details of a mortgagee clause, reach out to your lender. If you’re in the process of buying a home, you may have to agree to a mortgagee clause in your contract before you can get approved for a loan.

If you're thinking about purchasing a home, learn more about the ins and outs of the mortgage process and important steps, like getting homeowners insurance for your new home.