Why is my mortgage company involved in my insurance claim?

I had a small fire start in my garage that spread to part of the house before it was put out. It caused a lot of damage and this is my first time filing a homeowners insurance claim. My adjuster told me the payout check will be made out to both me and my mortgage company. I had no idea that was even a thing and now it'll just make it all more complicated. Why does my lender get involved in my insurance money, and what do I need to do next?

Involving your mortgage company in a home claim can definitely surprise (and maybe annoy) homeowners, but it's actually pretty standard. When you borrowed money to buy your home, you agreed that your mortgage company would be named as an additional insured on your policy. That's because your lender has a financial stake in the property until your loan is paid off. If your home is damaged and not repaired, the value of their collateral goes down, so they want to make sure insurance funds actually go toward fixing it.

So, if your home has structural damage, or in your case, fire damage that can have more complicated "hidden" issues, the insurance check is typically made out to both you and your lender. Neither party can cash it without the other's endorsement. It can feel frustrating, and it does add an extra couple of steps when you're dealing with a contractor, but it's built into your mortgage agreement.

The threshold for how closely your lender monitors the claim varies by servicer, typically between $10,000 and $40,000. Claims below that threshold are often released directly to you with minimal documentation; larger claims are disbursed in stages as repairs are verified. But it really depends, so ask your mortgage company for details.

There are a few types of payments your lender generally won't be involved in during the claims process. Insurance checks for personal property and additional living expenses should be payable only to you, since those coverages protect items and costs outside of the lender's collateral interest.

The most important first step after receiving a claim check is to contact your lender's loss draft department before doing anything else. They'll walk you through what documentation they need and how the funds will be released. Keep records of every conversation and every invoice as repairs progress, since that documentation will be required before funds are disbursed.

If this is your first claim as a new homeowner, it's okay to feel overwhelmed by the process. Don't hesitate to ask questions at every step. Our first-time homeowners insurance guide is a good resource to bookmark. I hope your repairs go smoothly!