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We had some hail damage to our roof and deck after a bad storm and made a claim with our insurance company. The damage was in the 5 figure range, but the estimate for the deck was only a couple of thousands dollars. Our mortgage company made the insurance company make the check out to both of us and it was paid out over two checks. We made the repairs to the roof and it passed the inspection.

However, we decided not to repair the deck because the damage was minimal. Our mortgage company is now getting on us to make the repairs to the deck so that they can close it out and are threatening to force us to return that portion of the money. We don't feel that we should have to make the repairs to the deck because we can take care of it ourselves whenever we decide to do so AND given the fact that the insurance company paid the claim, our mortgage company shouldn't have any say so in how we spend or don't spend the money.

We checked with our insurance company and they agreed that we don't have to make the repairs to the deck if we don't want to.

Are we legally obligated to make the repairs to our deck or can we tell our mortgage company to go pound sand?

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    Do you mean the deck, as where you hang out on nice days and sit in patio furniture, or the deck, as in the portion of the roof made of OSB, plywood, or 1x6 that lies beneath, supports, and provides an attachment point for your shingles? – Sean Oct 11 '16 at 18:29
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    Do you have a "standard" United States mortgage or something special? The Fannie Mae / Freddie Mac Uniform Instrument includes language in most states along the lines of "Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened. " – user662852 Oct 11 '16 at 19:30
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    It should be pointed out - the Insurance company's opinion does not really matter. They paid out for something that needed to be insured. They would not care how the money is used so long as they have fulfilled their obligations. Your mortgage holder is the one who actually matters in terms of opinions. – Sh4d0wsPlyr Oct 11 '16 at 19:39
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    Start by imagining an extreme case: A storm blows a tree down that crashes along the house's long axis. Insurance pays an amount that's 90% of the house value for rebuilding, but you choose to pocket the money and walk from the mortgage. Should a lender have recourse (other than foreclosure)? – user2338816 Oct 13 '16 at 4:10
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    If you don't feel the deck needs repairs then why was it claimed? – Octopus Oct 13 '16 at 8:02
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You submitted a claim for damage to the deck. The insurance company notified the mortgage company.

Now the mortgage company wants to make sure that the collateral for the loan is still in good condition.

They want you to make the repairs that you insisted needed to be done. They may even require you to use a licensed contractor before releasing the funds.

Once you own the house without a mortgage, then you can decide for yourself if minor repairs need to be done.

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    In short, it's not your house yet, so you can't make that decision. The mortgage company owns it, so they get to decide. – Brian Knoblauch Oct 11 '16 at 19:35
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    @BrianKnoblauch your statement is untrue. Those on the title own the home, the mortgage company owns a lien against the property. As such they are able to exercise some limited power over the home owners and this is one such case. – Pete B. Oct 11 '16 at 20:33
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    The mortgage contract will include clauses about maintenance that the OP agreed to do and repairing the damage is covered under those. The mortgage company does have an interest in maintaining the value of the collateral until the loan is paid off. – JamesRyan Oct 12 '16 at 9:57
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    @AlexanderKosubek if it's covering a loss of value, that means your house is now worth less money. Why should you get to pocket that difference when your bank still has a financial interest in the property? – Sam Oct 12 '16 at 14:25
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    @Alexander Kosubek, see Jasper 's answer for an example of the typical language in a US mortgage contract that requires repairs to be made if there is an insurance claim. – Charles E. Grant Oct 12 '16 at 16:33
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Your mortgage agreement probably gives you three options:

  • Pay off your mortgage in full.

  • Use the insurance company's deck-repair payment to fix your deck to be similar in quality to what it was when you took out the mortgage, allowing for normal wear-and-tear since you took out the mortgage.
    In other words, you can "restore or repair the property to avoid lessening the Lender's security".
    According to most American mortgages, if you can make the repairs for less than the insurance settlement, and the lender is happy with the work, you can keep the savings.

  • Hand over the insurance company payment for the deck to your lender, and have them apply that amount toward the principal of your mortgage.
    If the repairs are not "economically feasible", and you are current with your payments, most American mortgages specify this use of the money.

Here are some typical mortgage provisions in this regard. This is an excerpt from the Fannie Mae/Freddie Mac form 3048, which is the form used by most banks for mortgages in the state of Washington. (I have added paragraph breaks and bolding for clarity.) Many states have different wording, but the intent is the same:

In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender. Lender may make proof of loss if not made promptly by Borrower. Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened.

During such repair and restoration period, Lender shall have the right to hold such insurance proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender's satisfaction, provided that such inspection shall be undertaken promptly. Lender may disburse proceeds for the repairs and restoration in a single payment or in a series of progress payments as the work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds.

Fees for public adjusters, or other third parties, retained by Borrower shall not be paid out of the insurance proceeds and shall be the sole obligation of Borrower.

If the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower. Such insurance proceeds shall be applied in the order provided for in Section 2.

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    Note that #3 is taking cash from you, but in theory not reducing your net worth. It does reduce the mortgage holder's risk, because they have cash instead of your promise to make whole guaranteed against your (now reduced value) house. – Yakk Oct 14 '16 at 13:54
  • @Yakk: If damage is unaesthetic but does not impair usability, and if the reduction in value to prospective buyers would likely be less than the cost of repair, could the property owner regard that as "economically infeasible"? Would mortgage holders generally be happy or unhappy to accept such an option? If the insurance proceeds were given to the lender, would that be treated as a prepayment of principle for purposes of interest calculations? – supercat Oct 14 '16 at 15:39
  • @supercat Depends on what your contract says? – Yakk Oct 14 '16 at 17:27
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Check your mortgage paper work. Most mortgages have clauses requiring you to maintain the property, keep it in good repair, and to prevent spoilage. The property is the mortgagee's security for the loan, so it's reasonable that they have a voice in keeping the property in good shape.

You can tell them to pound sand, and then they can call the loan due in full.

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Let's illustrate how typical mortgage and its insurance works, from the very beginning.

  • You: How much for this house?
  • Previous owner: 100k
  • You: Give me a 100k loan, I'll let you hold this 100k asset as collateral
  • Bank: Is it really worth 100k?
  • Appraiser: Yes, it is worth 100k.
  • Bank: Here is 100k for you. Now insure it for this amount so the value of my collateral is protected.

few years pass

  • You: Storm damaged my house.
  • Expert: Damage was for 10k, therefore the house is now worth 90k.
  • Insurer: Here is your 10k. Our deal is done, do whatever you want with it.
  • You: I've fixed my house back to 98k and the last 2k I'll save for later
  • Bank: Wait a minute! Our deal was to have 100k asset as a collateral. I don't agree to a 98k one!

You're at the last point now. The whole point of the insurance was to preserve value of bank's collateral, at least from its point of view. By making a claim you have testified that a damage has occurred and some value of the property was lost. It's only reasonable for the bank that it wants the value of the asset to be restored to the value of the loan. Or the other way around. Bank doesn't really care if your deck is repaired, it only cares to have right side equal left side in the books. By taking the mortgage you've agreed to preserve the value of the property. There are many ways out of this situation, but pocketing the money isn't one of them.

There is no need to fight the mortgage company, because they're right. Talk with them in good faith and walk through available options. If you feel that you can live with the deck as it is, then paying back part of the loan might be a good idea. You don't "lose" the money this way, you're still 2k ahead - just not now, but in 20 years.

Afterthought: it's possible that it would be "enough" to re-evaluate the house to ensure it's still worth its original value even with damaged deck (eg due to other improvements you've made over the years or general property prices rising in the area). I put quotes, because you have to count costs of reevaluation which may be too big to make it worth. AND it might turn out it's worth even less, eg if the prices dropped. Or add another collateral, but that means signing another lien which also costs money.

  • I'm assuming between the origination of the loan and the time of damage the loan has been paid down some. Does that decrease the needed collateral since the risk the bank holds has decreased? – antony.trupe Oct 13 '16 at 15:30
  • @antony.trupe That's what common sense tells us : ) But it's not common to change entries in registry to reflect smaller loan as it's being paid off. Lien is usually kept in full amount until the loan is closed completely. I don't know why it's done this way. – Agent_L Oct 13 '16 at 16:54
  • I like how you break down the situation into simple bullet points. Well done. – Cypher Oct 13 '16 at 17:20
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    @antony.trupe The fact that they have less security now (as a percent) and more later is also part of the risk analysis of the bank, as (they hope) you pay down the house faster than it depreciates. – Yakk Oct 14 '16 at 13:56
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The long and short of it is, the mortgage company has a significant interest in the resale value of the home in the event of a default. Imagine a scenario where you say to yourselves that you're not going to repair the deck just yet ("meh, we'll do that next summer") and something happens that causes a default on the mortgage.

The resale value of the home may be harmed by the deck, even though you're willing to live with it. That being the case, the mortgage company has every right to insist that you carry out the repairs in order to maintain the property in salable condition, so the essence of it is, you don't have much choice but to do the repairs.

Keep in mind too that the insurance company paid for the roof and the deck to be repaired. If they were to learn that you now have no intention of using the money to repair the property, you could end up in legal hot water with them. After all, you did accept the check for repairs that you're now not carrying out.

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    Are you referring to the insurance company in the last paragraph? They don't care what you do with the money. The OP even checked with them and confirmed that. – Kat Oct 11 '16 at 21:12
  • The insurance company may say that (I'd want that in writing, by the way), but if another claim comes up on that deck before it's repaired from the first claim then there might be a real issue. Then you'll find out whether or not they care. – Daniel Anderson Oct 11 '16 at 21:28
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    Maybe if the original damage contributed to further damage, then a claim for the further damage could be denied, sure. But the insurance company already knows they might not make repairs, and says it's fine. If they have a problem with it, they should cancel the policy. The home owners are not going to "end up in legal hot water" with the insurance company for not making the repairs. It doesn't affect them at all, so why would they care? – Kat Oct 11 '16 at 21:40
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    The last paragraph seems wrong. The insurance company is insuring the policyholder against loss; they have no interest in whether you prefer the cash or the repair as long as the amount of the loss was not fraudulently exaggerated. – R.. Oct 12 '16 at 1:13
  • @DanielAnderson: The amount of the loss from the later damage to the deck should be measured from its condition immediately prior to that damage. If it was partially-repaired, the condition after the damage should be compared against its partially-repaired state. – supercat Oct 14 '16 at 15:44
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It's just possible that if you have your home appraised (probable cost a few hundred $), and the value is sufficiently higher than what the mortgage company is owed, that they will let this slide, since they are covered. Many banks, at least, allow secured lines of credit against the equity in your home, and allow the amount of the loan to increase if/as the value of the property goes up and your equity increases. However, I'd run this by the mortgage company before investing in the appraisal, since they may not be as flexible this way as the banks I've dealt with, and in any case it's a gamble unless you are certain of the value of your property.

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protected by Chris W. Rea Nov 2 '17 at 0:04

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