homeownership

What is a mortgagee clause? Here’s everything you need to know

A mortgagee clause protects your lender’s financial interest in your home. See how it benefits you, too.

Laura Gariepy
February 20, 2024

You might also like:

Get up to $500k from your home equity.

No monthly payments.
Prequalify now

Get up to $500k from your home equity.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
No monthly payments.
Share on social:

Buying a home is a complicated legal transaction involving a lot of paperwork. As you work through those documents, you may encounter terms and concepts you don’t know, including the mortgagee clause. We’ll define what a mortgagee clause is and discuss how it works so you can be a well-informed new homeowner.

What is a mortgagee clause?

When you borrow money to buy a house, you become a mortgagor (loan holder), and your lender becomes a mortgagee (loan issuer). During the mortgage closing process, you’ll sign multiple documents that spell out the terms of your home loan. A mortgagee clause is a stipulation within your homeowners insurance policy that protects your mortgage lender in the event your property gets damaged or destroyed.

How the mortgagee clause works

Generally, when you think of homeowners insurance, you think of financial protection for you if your residence gets damaged or destroyed by a qualifying peril. However, the mortgagee clause is a formal agreement within the policy between your lender and your homeowners insurance company that protects your lender’s financial interests in the property.

For example, let’s say you default on your mortgage, and the lender must foreclose on and resell your home. However, the building is severely damaged, eroding its value. The mortgagee clause will kick in, resulting in your lender receiving the full amount you owe. Due to the coverage, your debt will get wiped clean.

As another example, let’s say your house caught on fire and was written off as a total loss. During the investigation, the fire department discovered that the cause of the fire was arson, and you were arrested and ultimately convicted of the crime. Your homeowners insurance company wouldn’t pay you anything because you intentionally caused the damage. However, your insurer would pay your lender so that the bank didn’t sustain a loss.

Important note: If you take out a second mortgage on the property, you’ll need to add it to your homeowners insurance policy.

You may see some unfamiliar acronyms within the mortgagee clause, such as ISAOA and ATIMA. ISAOA stands for “its successors and/or assigns,” while ATIMA stands for “as their interests may appear.” Both phrases permit your lender to transfer the protection of the clause to another party, generally in the event the bank sells your loan to another financial institution.

The mortgagee clause will also contain a section called "lender protections." This segment will discuss the lender's protection against financial loss should the institution be unable to obtain full repayment from you or sell the residence for at least the remaining balance due.

Importance of the mortgagee clause in property insurance

The mortgagee clause helps both parties involved in the home-buying transaction. While the lender’s benefit is obvious (they can recoup what they lend), you, as the borrower, should be thankful for the clause, too. Without it, no bank would be willing to lend you enough money to purchase a house because the risk of financial loss would be too great.

Plus, let's suppose your lender forecloses on your damaged home while it's uninsured (hence, no mortgagee clause exists). You may be liable for the difference if the bank can't sell it for a high enough sum to pay off the remaining balance on your home loan.

How do you get a mortgagee clause?

Generally, your lender will require a mortgagee clause in your property insurance policy to close on the mortgage, so you likely won’t have to do anything to get one. However, if you don’t see the clause in your coverage, you can contact your lender to have it added.

Sometimes, an insurer may choose to cancel or not renew a homeowner’s policy for various reasons, including non-payment, poor credit score, or criminal charges. Since your mortgage is contingent on the residence being insured, if you lose your coverage, you’ll have to reinstate it or replace it as soon as possible.

Important note: When you cancel your homeowners insurance after you sell your house, all property protection, including the mortgagee clause, ceases. The new owner will be responsible for securing the appropriate coverage.

Final thoughts

A mortgagee clause reduces a lender’s risk of financial loss, enabling the bank to issue home loans confidently. As a homeowner, you don’t have to do anything except maintain a valid homeowners insurance policy for the duration of the loan term. Keeping up your coverage is a contractual obligation that comes with your mortgage or any other home equity product, so make sure you’re always covered. 

Get home equity, homeownership, and financial wellness tips delivered to your inbox.

Thank you for subscribing!

Check your email for a confirmation. We’ll be in touch soon!
Success!
Oops! Something went wrong while submitting the form.

Frequently Asked Questions

No items found.

Get up to $500k with no monthly payments.

No income requirements
No monthly payments
No need for perfect credit
Learn more about Point’s HEI

Point in the media

Our innovative products have been featured in top publications.

Business Insider
Point CEO, Eddie Lim made Business Insider's 100 people who are transforming business
Every year, Insider surfaces 100 leaders across 10 industries who are driving unprecedented change and innovation. Lim, the CEO and cofounder of Point, wants to make it easier for people to tap into that wealth. Lim’s company, which he founded alongside Eoin Matthews in 2015, offers homeowners lump sums of cash in exchange for a stake in their home.
Read this article
TechCrunch
Point closes on $115M to give homeowners a way to cash out on equity in their homes
Historically, homeowners could only tap into the equity of their homes by taking out a home equity loan or refinancing. But a new category of startups have emerged in recent years to give homeowners more options to cash in on their homes in exchange for a share of the future value of their homes.
Read this article