Avoid this Insurance Problem at Closing

What could go wrong at closing?  You are the realtor who has worked for weeks , showed several properties and driven all around the county to find the perfect home for your client.  You are at the title company ready to have your client sign all the papers. All of the sudden there is a hold up. You get a text from the the lender that says you can’t proceed.

There is a problem with the insurance. Your client went to get homeowners insurance, but made a mistake.  The client got insurance, but didn’t have the lender named as a party to be paid in the event of a catastrophic loss.  The policy didn’t contain the mortgagee clause. The mortgagee clause lists the lender as a party that will get paid if there is a large loss. It includes the information the insurance company needs for them to get paid. Such as their name, loan number mailing address to be listed as an additional interest on the policy.

Without the lender being named as someone being insured, if the house burned down, the entire payment would go to the homeowners. In spite of them being called a homeowner. It’s the bank that “owns the home” until the loan gets paid off. A bank doesn’t want to take the risk of the homeowner getting paid off and walking away from the loan (defaulting) because the collateral would be burned to the ground.

As a real estate professional there are a few things that you can do to avoid this problem. When your client says they have an insurance agent, make sure to connect the insurance agent with the lender. The lender will communicate with the insurance agent that the mortgagee clause is in the policy. Central Ridge Insurers provides a checklist for real estate professional to share with their clients.

Help your clients make the right decisions about insurance to avoid closing delays.