If you have a home mortgage, the payout check on a home insurance claim will be made out to you and your lender, meaning you will have to endorse it before sending it to your mortgage company for them to endorse. Depending on the amount of the claim, your mortgage company will either disburse the full amount needed for repairs or break it up into segments. Only the money for structural damage claims should go through your lender. Claims for personal belongings or additional living expenses are paid out directly to you.

You may be able to hold onto excess money left over from your insurance claim after the repairs are done, but it depends on your state's laws, as well as your home insurance policy and your mortgage company.

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How do insurance companies pay out claims on mortgaged homes?

When you file a home insurance claim on a house you're mortgaging, your mortgage lender will have an active role in the payout distribution. Once you've filed a home insurance claim and it's found valid, your insurer will issue a check made out to both you and your loan company.

Mortgage companies usually want to maintain some control of home insurance payouts after a claim due to their financial interest in the state of your house. Many mortgage lending agreements include a clause that gives the lender control over funds for a home insurance claim payout.

When you sign your mortgage agreement, your lender will usually require you to list them as a "loss payee" on your home insurance policy. Loss payee status allows them to receive home insurance claim payouts in order to secure their financial interests and ensure proper repair of the house. Mortgage companies may then put the funds into an escrow account to disburse for needed repairs.

Recoverable depreciation

Another factor that can affect how you're paid out for a claim is not in the hands of your mortgage provider, but your home insurer. Your home insurance policy should have one of two clauses: recoverable depreciation or non-recoverable depreciation.

If your home insurance policy has a recoverable depreciation clause, your initial payment will be based on the actual cash value (ACV) of the home. Here's how it differs from replacement cost:

  • ACV: this payout is based on the dollar value of the parts of the home that need repair or replacement, minus depreciation due to age.
  • Replacement cost: the total cost needed to restore the parts of the home to their pre-damaged state, without depreciation.

With recoverable depreciation, the first part of your claim payout will be at ACV, with the replacement cost difference paid out once the repairs are completed. If your home insurance policy has a non-recoverable clause, you will only receive a payout at ACV. There will be no more payouts on that portion of the claim afterward.

Will all of the home insurance payout go to your mortgage lender first?

Your mortgage lender is only interested in the structure of your home, so any payouts on your claim that do not involve the structure should not go through them. For example, with additional living expenses (ALE) coverage, your home insurance company will send a check directly to you to cover your lodging, food and other needs while your house is being repaired.

Another example is the payout for personal belongings. If your home is damaged in a fire, any of your possessions — such as furniture, clothing and other items — are not under the control of your mortgage company. Your home insurer will send you a separate check to cover the repair or replacement of your belongings.

How does a payout happen if the house is a total loss?

If your house is totally destroyed, your home insurance should cover the loss up to your policy's limits. If you choose to rebuild after a total loss, the claim money usually will be held in escrow by your mortgage company and disbursed to you as the construction schedule is completed. While rebuilding, You should directly receive a check for ALE and personal property damage.

It's important to know that you are still obligated to pay your mortgage during the repair or rebuild process, unless the insurance claim payout completely covers the loan balance.

Alternatively, if you want to just fulfill the mortgage obligation. You just pay your lender the remainder of what you owe on the mortgage balance and your insurer will release the claim funds to you.

How to get home insurance claim money from your mortgage provider

How your mortgage lender distributes the claim payout to you largely depends on the dollar amount involved. If the claim total is $15,000 or more, your mortgage lender will put the payout into an escrow account. You will then probably receive the money from your lender in three payments:

  • The first payment will probably come to you shortly after your mortgage lender has documented the payout. This allows you to get the necessary repairs started.
  • The second payment will usually come once the repairs have been halfway completed.
  • The third payment should come once the repairs are completed. Your mortgage provider will want documentation and receipts as evidence of completion. They may also require an inspector to check off on the repairs.

If the claim amount is less than $15,000, the payout process may be easier. Most mortgage providers won't put a hold on your claim payout if it's less than this amount. They'll often just endorse the check and release the total amount to you. Still, they'll want to see evidence of the repair's completion, so hold onto all documentation involved in the work.

If your loan is delinquent, there is a chance that your mortgage provider may use a portion of the payout to bring your loan balance current. But it's not standard practice, as mortgage lenders do not gain much from being a lienholder on a damaged home. However, it is still something to be aware of.

Can you keep leftover insurance claim money?

Depending on your state's laws, your home insurance policy and your mortgage company, you may be able to keep any remaining money from your claim payout after repairs have been completed. If you are able to find a cheap contractor who can do a satisfactory job with good materials, both your insurer and lender will likely focus primarily on the end result. If this is achieved, the remainder of the payout will probably be yours.

There is a chance, however, that your mortgage lender may have different ideas about what is done with any leftover claim funds. They may put the excess payout towards your home loan balance. The best thing to do is to ask your mortgage company what their standard practice is for surplus claim funds after the repair is completed.

If you are able to keep the remaining claim money, it's important to stay honest with both your home insurer and your mortgage lender during the repair process. Do not try to cut corners on the quality of repair work needed or falsify receipts. Either may be considered felony insurance fraud, which can possibly land you in jail and cost you money in fines. Also, your home insurance company may drop you.

What happens if your mortgage company doesn't release your home insurance payout?

If your mortgage is delinquent, your lender may withhold or deny a home insurance claim payout. However, if you're up to date on your payments and they are still dragging their feet, there are a couple of steps you could take.

The first step is to contact your mortgage company. While it may be tempting to go to your home insurance provider with the issue, your lender is the most qualified to explain what the holdup is and what needs to be done to rectify it.

If you're not able to make any headway with your lender to get the payout released, try contacting your state's office or agency in charge of insurance consumer protection.
