During a mortgage refinance, it’s usually normal for your new lender to become the first mortgagee on your homeonwer’s insurance policy before finalizing the refinance.
Q: Should a mortgage broker or a lender name themselves as the first mortgagee on a homeowner’s insurance policy without first completing the underwriting process, appraisal and funding the loan at closing?
I am going through a refinance and don’t even have final approval from the underwriter. And the appraisal of the property isn’t even back yet. Now my homeowner insurance company called me and said the broker and/or lender had made a request to remove my current mortgage company and put the future unconfirmed lender as the first mortgagee on the policy.
What do you think was going on here? When I called the broker, he said it is part of the underwriting process. Can this be true?
A: While it seems counterintuitive, the process does seem to work that way. For you to obtain a new loan on your home, the new lender must underwrite your loan. In the process of reviewing the documentation, the new lender will want to see that you have homeowner’s insurance in place. Not only that, but it will want to know that the they – the new lender – are listed as the mortgagee on the new insurance policy.
Your old lender may get the notice that they have been taken off as mortgagee on your insurance policy, but by then you will have refinanced on your home. At least we’d hope that you’d refinanced by then. If for some reason you don’t refinance, you’ll need to make sure that your old lender is still listed as a mortgagee on your homeowner’s insurance policy.
While some lenders may wait until later in the process to have the insurance in place, others may issue a loan commitment but have as a condition to the commitment having the insurance in place naming the lender as the mortgagee.
If you are working with a reputable company, we doubt you have anything to worry about. We do think that it’s great that you’re asking these questions (and why we’re pleased to share your question in the column, since typically homeowners don’t have any insight into this part of the process).
We don’t know if your insurance agent has been in the business a long time, but he or she should have been able to tell you that it’s quite normal for lenders to request the change prior to the closing. How far in advance may be an interesting question. We don’t think that a lender should do that two months prior to closing or at the time you apply for the loan.
Your existing lender is entitled to remain named as the mortgagee on your insurance policy until you close on the refinancing, but the insurance company may still be on the hook to that lender for 30 days as they are generally required to tell the lender of the cancellation and give them advance notice of the change.
Keep in mind that the reason the lender is named on your policy is to make sure that after a fire or other loss you don’t get the insurance proceeds directly. Your lender gets a say in when the insurance proceeds get distributed to you as the lender will want to make sure the home is rebuilt and the money goes to the repair or rebuilding of the home. If a casualty (like a fire) occurs prior to closing, your current lender will want to control the money unless the loan is paid off. If the casualty occurs after the closing, the new lender will want to control the money.
Naming the lender on your policy is there for the lender’s protection and not yours. You just need to make sure you abide by the terms of your loan with your current lender until you close and then abide by the term of your new loan after you close.