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I am buying a house, and got a set of documents from my lender today. A part of that document says:

Please notify your insurance agent that your hazard insurance and if applicable, your flood insurance, should include a standard mortgage and/or loss payable clause in favor of the lender.

If I read that right, it means that if something were to happen to the house, and if I were to file an insurance claim (flood, or repairs etc.), the money would go to the lender first? It doesn't seem "right" to me. Is this kind of clause standard, or should I try to find another lender?

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Why doesn't it seem right to you? The lender financed the house and has the first right claim (mortgage) on it, so if you have any insurance proceeds they're first offsetting your debt to the lender. Same as if you were selling the house - first the loan is paid off, whatever is left goes to you.

If the property is not lost, then the proceeds are going to you and you keep paying the mortgage. So if a pipe burst and you need to replace the flooring, the insurance will cover it, and you'll get the proceeds. If the building is lost and you're paid the fair market/rebuild value, then you first need to pay off the mortgage.

Its standard.

  • Thanks. Your explanation makes sense. I was mainly worried if this was standard or if my lender was doing something that's non-standard (which might mean that they weren't good). – user536048 May 25 '12 at 13:07
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Here's a good rule of thumb. In any situation where you are required to purchase insurance (Auto Liability, Property Mortgage Insurance, etc.) you can safely assume that you aren't the primary beneficiary. You are being required to buy that insurance to protect someone else's investment.

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