Why Is My Mortgage Company Withholding My Home Insurance Claim Settlement Money?

In some cases, mortgage lenders withhold homeowners insurance claim funds to ensure the money is used to repair or replace a damaged or destroyed home.

photo of pile of money

They say patience is a virtue. Well, it's also something to exercise if you ever file a claim on your homeowners insurance policy.

That's especially true if a storm or some other incident or event severely damages or even destroys your home.

The reason: it isn't unusual for insurance companies to respond to such claims by sending a check that's written out to both the homeowner and their mortgage company.

More specifically, insurers often send those checks to homeowners, who then sign and pass them along to their lenders.

This is where things can get a bit tricky, and why you might need to be patient.

You see, in many cases, mortgage companies cash the claim checks homeowners send their way and then keep the funds in an escrow account--at least for a while.

How this impacts the homeowners in these situations should be obvious: it can keep them from repairing or replacing their houses.

Why do mortgage companies do this? And how can they do this? Keep reading to learn more--and to learn what you can do to get your hands on your home insurance claim payment as quickly as possible.

You'll also learn what you can do, or who you should contact, if your lender drags its feet and fails to release these funds in a timely fashion.

Why Mortgage Companies Withhold Claim Funds (And Why They Can Do It)

The quick answer to both of the questions posed above is: because they can.

That's not the most helpful or detailed response, though, is it? To be a bit more clear, the main reason mortgage lenders often hold on to home insurance claim funds is they have a financial interest in the properties they helped people buy.

"Lenders have a substantial investment in the property, sometimes more than the homeowner," Michael Barry, vice president of media relations for the Insurance Information Institute, tells hsh.com.

And because of that substantial investment, they want to make sure people use the money their insurance companies send them to properly repair or replace their damaged or destroyed homes.

They can't do that, though, if homeowners cash their claim settlement checks on their own. After all, some of them might cash the checks and pocket the money.

“You don’t want the homeowner to take the money that should go to the repair of the house to the craps tables in Vegas," Robert Hunter, director of insurance for the Consumer Federation of America, says via marketwatch.com.

That would be a problem for the lender, as it likely would result in the property they helped purchase losing value.

As for why or how your mortgage lender can withhold home insurance claim funds in this way, the gist is the mortgage or deed of trust you signed at closing (which one depends on where you live) allows it to do so.

In particular, that document includes something called a “mortgagee clause." It gives the financial institution holding your mortgage a lot of power in this type of situation. Specifically, it lets your bank or credit union control your insurance claim funds in a number of ways. One is that it can put the money in an escrow account and only release it to you when it's confident your home is being properly repaired or replaced.

To put it another way: your mortgage company earned the right to withhold your insurance claim funds when you borrowed money from it and then offered up your new home and property as collateral.

Thanks to this, you, the homeowner, basically are at the mercy of your mortgage lender in this kind of situation. For the most part, what it says or does goes as far as your home insurance claim funds are concerned--even if that makes it difficult for you to deal with home damage or destruction.

Mortgage Companies Don't Treat All Claim Checks Equally

Now for some good news: your mortgage company won't pull this every time your insurer sends the two of you a claim check.

Or at least it won't if it's like most mortgage companies.

How so? Well, most of these companies don't hold up funds if the associated insurance claim is for less than $15,000. (And if your mortgage is current--more on this in a few minutes.)

In such instances, the lender usually just endorses the check you send them and releases the money to you with a minimum of fuss and hassle.

That's not to say they won't ask for any documentation or otherwise bother you in any way. It does mean, though, that they likely won't cause you to jump through all of the hoops that usually come with bigger claim checks.

Speaking of which, if your home insurance claim check is for more $15,000, don't assume or expect your lender to release the entire sum to you all at once.

"For a larger claim, the lender becomes more intimately involved with the repair process," says Michael Northagen, vice president with Wells Fargo Home Mortgage in Minneapolis, Minn. (Again, via hsh.com.) It might want to see contractor estimates, for example. Or it might ask for W-9 documents related to the needed work.

"Under these circumstances the lender would put the insurance funds in escrow after getting the borrower's endorsement and then would release the funds in three installments," Northagen adds.

Generally, he explains, you can expect the first payment to come your way shortly after the mortgage company has received your claim check. The second payment should arrive around the time the repair or replacement work is about half done. (Most lenders will pay for an inspection that verifies this.) Finally, look for the third payment when the project is complete. (And after the lender once again has verified it.)

How Mortgage Delinquency and Default Can Impact the Release of Your Claim Funds

That's how things are supposed to work, anyway.

Sometimes, though, lenders don't release home insurance claim funds as quickly as they should.

“Smaller banks sometimes can be really good and quick, but there are also some big banks that can be just horrible,” explains Robert Passmore, assistant vice president of personal lines policy at the Property Casualty Insurers Association of America. (Via marketwatch.com.) “Some will want to see estimates, some want to see pictures (of the repairs), and some will send an inspector out."

And at other times, they don't release the funds at all, but instead use them to pay off the homeowner's mortgage in part or in full.

Admittedly, this isn't common practice. Still, the Internet is littered with stories of it happening.

Lenders mostly seem to reserve this tactic for when a mortgage is in default. It isn't unheard of for them to do it when a mortgage is delinquent, though--especially if it's severely delinquent. (Homeowners are delinquent on a mortgage when they fail to make a payment--even just one--by the monthly due date. They're in default when they fail to make three or more mortgage payments.)

"If the borrower is severely delinquent, we handle the situation on a case-by-case basis," says Wells Fargo's Northagen. "We try to work with our customers, but ultimately, if the borrower is not cooperating and not returning messages or is no longer living in the home, the servicer may ask to have the insurance proceeds applied to the loan balance."

Something to keep in mind here: although mortgage companies have every right to do this--make people use their insurance claim funds to pay down (or off) their home loans--they only rarely take advantage of it.

Why? Because it does them no good to leave your home damaged or destroyed. They only benefit if it's restored to the condition it was in when you bought it.

As such, do whatever you can to stay on top of your mortgage payments. That way, you'll be in the best possible position if you ever need to file a home insurance claim.

Other Home Insurance Claim Settlement Advice

Keeping up on your mortgage payments is just one piece of advice that will make filing a home insurance claim as painless as possible. Here are a few other pointers that should prove similarly helpful.

  1. Contact your lender as soon as possible after your home is damaged or destroyed.
  2. Don't bother calling its 800 number. If at all possible, call (and email) your mortgage loan officer. He or she is person who wrote your home loan.
  3. If you can't find your loan officer's contact information, contact the company's escrow department. Look for the relevant details on your year-end escrow statement.
  4. When you finally connect with someone at your mortgage company, make a note of that person's name. Also make note of the time and date of the call.
  5. Continue to keep detailed records of any communication you have with someone at your mortgage company about this process.
  6. Don't give up. Be persistent. But try to remain polite and patient, too.
  7. Review both your mortgage and your home insurance documents. This should go a long way toward helping you understand your rights as far as your claim funds are concerned.
  8. If your lender seems to be dragging its feet, or worse, contact your state's department (or division) of banking and insurance. 

Also consider contacting or even filing a complaint with one or more of the following:

  • the Federal Trade Commission
  • the Consumer Financial Protection Bureau
  • your state attorney general’s office of consumer protection

Frequently Asked Questions

Q: Why can’t I deposit my insurance claim checks and use them as I see fit? Why do they have to go through my mortgage company first?

A: Your home insurance company makes claim checks out to both parties (both have to sign them) because both of you have a financial stake in the property.

Thankfully, your mortgage company probably won't do much to hold up your claim funds if they're less than a certain amount. Most experts put that amount at $15,000, but of course it's possible some lenders have higher or lower thresholds than others.

Q: How long does it usually take mortgage companies to release insurance claim funds?

A: It's hard to assign a set number of days or weeks to this process. In general, though, lenders usually send the first check after they've documented the claim. That allows homeowners to begin paying any contractors they've hired to handle repair or replacement work.

You may receive your claim funds faster than that, though. And you also may receive them all at once, rather than in three installments. No all lenders deal with this situation in the same way.

Q: What if my contractor demands to be paid before agreeing to repair or rebuild my house?

A: No builder or contractor is going to finish a job without getting paid any money whatsoever. That said, most will agree to the work and get started on it with a partial payment.

Assuming your lender releases a third of your claim funds right away or nearly right away (as is usually the case), that should give you enough to cover the first part of your home repair or replacement project.

If you come across a builder or contractor that demands to be paid in full before doing any work, though, look for someone else.

Q: Will the mortgage company pay me interest on the insurance claim funds they hold in escrow?

A: You would think so. Unfortunately, most lenders won't do this without a fight. And many won't do it even then.

If this is important to you, though, ask for it. The worst your lender can do is say no.

Q: Who can I complain to if my mortgage company won't release my home insurance claim funds?

A: There are number of places you can turn to for help here, if needed. Two of the best are your state's division or department of banking and insurance and its office of consumer protection.

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