How does a mortgagee clause interact with homeowner's insurance?

A homeowners insurance policy helps cover costs if your home is damaged or destroyed by a covered loss. If you have a mortgage, your lender will want to ensure its interests — the funds it lent you — are also covered. This is accomplished by adding a mortgagee clause to your homeowners insurance policy.For example, say you buy a house for $500,000 with a $100,000 down payment and a $400,000 mortgage. To protect your investment, you purchase a homeowners insurance policy with $500,000 worth of coverage for the home. Your lender wants to protect its investment too, so you add a mortgagee clause to your policy.Now, say a wildfire incinerates your home while your family is safely out of town. In that case, your insurance company would give your lender a $400,000 payout to cover the outstanding mortgage debt, and pay you $100,000 to cover the equity you have in the home—allowing you and your lender to avoid substantial financial losses.

Why is a mortgagee clause important in a real estate transaction?

Most lenders will only approve a mortgage application with a mortgagee clause attached to the homeowners insurance policy. A mortgagee clause protects your lender if the property you borrowed to buy is damaged or destroyed, ensuring it gets reimbursed for its share of the loss. The mortgagee clause’s coverage allows banks and other financial institutions to reduce their risk in lending to you. Without it, they might be more reluctant to issue mortgages, since they’d go uncompensated if the collateral — the home — became worthless.

What is a mortgagee clause?

Written by

Jean Folger,

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Troy Segal,

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Thomas Brock, CFA, CPA,

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Published on March 11, 2024 | 5 min read

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Key takeaways

Many mortgage lenders require borrowers to have a homeowners insurance policy with a mortgagee clause.
The mortgagee clause is a provision that protects the lender from financial loss if the mortgaged property is substantially damaged or destroyed.
A mortgagee clause protects the lender even if the damage to the property was intentional and would otherwise void the insurance policy.

If you’re like most homeowners, you’ll need a mortgage to finance a home purchase. Since the home serves as collateral on the loan, your lender will want to ensure the property — its investment — is adequately insured. Along with proof of homeowners insurance, your lender may require you to have a mortgagee clause, a provision in the policy that protects the lender from financial loss if your home is damaged or destroyed. Here’s a closer look at how a mortgagee clause works.

Mortgagee definition

As you review your mortgage documents, you’ll encounter two terms: “mortgagee” and “mortgagor.” Who on earth, you might wonder, are they?

Who is the mortgagee? While legal language can be tricky to decipher, “mortgagee” is a relatively simple term. It’s another word for the lender: a bank, credit union, mortgage company or other lending institution that provides the funds to purchase or refinance a home.

Who is the mortgagor? On the other side of the transaction is the mortgagor—the borrower who accepts the funds.

A mortgage loan has two parts:

The promissory note. This is the financing instrument that acts as evidence of the debt. It’s a written promise or agreement to repay the debt in installments with interest. The mortgagor (borrower) executes a promissory note to reflect the amount of the debt.
The mortgage (or deed of trust). This is the document that serves as security for the loan. It conveys the property to the mortgagor (lender) as collateral for the debt.

Because the home is collateral, your lender can foreclose on the property—and sell it to recoup costs—if you default on the loan. But what happens if the home is damaged or destroyed? That’s where the mortgagee clause comes in. It ensures the lender receives an insurance payout covering its interest in the property.

What is a mortgagee clause, and how does it work?

Your lender will require you to have a homeowners insurance policy that helps cover costs if your home is damaged or destroyed by a covered loss, such as damages caused by:

Fire and smoke
Wind and hail
Lightning strikes
Theft or vandalism
Personal liability

A mortgagee clause protects your lender’s interest in the mortgaged property for these same losses. (Note that standard policies don’t cover damage caused by floods, earthquakes, or routine wear and tear). The lender is covered up to the outstanding amount of the mortgage, to pay for repairs that can restore the property to its pre-damaged condition.

Even though the mortgagee clause is part of your homeowners insurance policy, it’s actually an agreement between your lender and insurance company safeguarding the lender against significant losses if your property is damaged or destroyed. The clause is added to your policy (at your expense) and is usually a prerequisite to mortgage approval.

If the mortgaged property is substantially damaged or destroyed, the mortgagee clause guarantees the lender will be compensated for its portion of the loss. Your insurance company will evaluate the damages, determine the payout amounts, and issue payments—first to your lender and then to you.

The protection applies even if the damage is intentional. Say you deliberately set your house on fire, causing it to burn to the ground. In this case, your lender would still be covered, even though your insurer would void your policy if it determined you committed arson.

Finally, the mortgagee clause ensures the insurance company will notify the lender if you stop paying your insurance premiums or your policy is canceled for another reason. Your lender may obtain a new policy with a different provider and add the costs to your monthly mortgage payments.

Mortgagee clauses often come into play with foreclosures. Say a lender seizes a home that’s been severely damaged by the defaulting owners. The clause allows the lender to claim insurance funds to restore the home and sell it.

What are the components of a mortgagee clause?

Here’s a quick look at a few terms that may appear in the mortgagee clause.

Lender protections. These are the heart of the clause: the stipulations that protect the lender against financial loss and limit its exposure if the mortgaged property is damaged or destroyed — even if it’s a deliberate act by the borrower/mortgagor.
Loss payee. The party entitled to the insurance company’s reimbursement — synonymous with the mortgagee or lender, in this case. Mortgagee clauses are sometimes referred to as “loss payee clauses.”
ISAOA. ISAOA is an acronym for “its successors and/or assigns.” It means the mortgagee can transfer its rights to a different financial institution or lender.
ATIMA. ATIMA is an acronym for “as their interests may appear.” It extends the insurance coverage to third parties the lender does business with and could suffer losses, even when they aren’t explicitly named in the policy.

The latter two sections allow the lender to sell the loan on the secondary mortgage market. (Lenders often don’t keep the mortgages they originate on their books, though they may continue to service them.)

If your mortgage is sold, be sure to update your policy’s mortgagee clause with the new lender’s name and details.

How do you get a mortgagee clause?

During the mortgage approval process, your lender will inform you that you must take out a homeowners insurance policy before your loan can close, and if it must include a mortgagee clause (this directive may be documented in your commitment letter). Once you compare the best homeowners insurance companies and choose an insurer, you’ll inform the insurer to add a mortgagee clause or loss payee clause in your policy. You’ll probably provide your lender’s details and your loan number.

If you ever do file a claim, you’ll complete the loss payee section with your mortgage lender’s info.

Mortgagee clause FAQ

A homeowners insurance policy helps cover costs if your home is damaged or destroyed by a covered loss. If you have a mortgage, your lender will want to ensure its interests — the funds it lent you — are also covered. This is accomplished by adding a mortgagee clause to your homeowners insurance policy.

For example, say you buy a house for $500,000 with a $100,000 down payment and a $400,000 mortgage. To protect your investment, you purchase a homeowners insurance policy with $500,000 worth of coverage for the home. Your lender wants to protect its investment too, so you add a mortgagee clause to your policy.

Now, say a wildfire incinerates your home while your family is safely out of town. In that case, your insurance company would give your lender a $400,000 payout to cover the outstanding mortgage debt, and pay you $100,000 to cover the equity you have in the home—allowing you and your lender to avoid substantial financial losses.
Most lenders will only approve a mortgage application with a mortgagee clause attached to the homeowners insurance policy. A mortgagee clause protects your lender if the property you borrowed to buy is damaged or destroyed, ensuring it gets reimbursed for its share of the loss. The mortgagee clause’s coverage allows banks and other financial institutions to reduce their risk in lending to you. Without it, they might be more reluctant to issue mortgages, since they’d go uncompensated if the collateral — the home — became worthless.