Insurance Checks Made Out to the Homeowner and the Mortgage Company

You signed the job, the adjuster has been out, and the insurance company has paid. Then the homeowner tells you the check is made out to her and her mortgage company, the mortgage company has it now, and nobody can say when the money will come. On insurance work, this can leave a finished or half-finished job waiting to be paid.

The delay is predictable, and most of it can be planned around. Here is why the check carries two names, how the money comes back out, what one large loan investor’s rules and one state’s law say, and what to put in your contract.

Why the check has two names

The lender has a stake in the house. The NAIC’s consumer guide to home insurance explains: “Most mortgage lenders require you to have insurance as long as you have a mortgage and to list them as the mortgagee on the policy.” The Texas Department of Insurance’s home insurance guide says what follows when a claim is paid: “If you owe money on your home, the insurance company will make the check for repairs out to both you and your mortgage company.”

TDI describes the usual path from there: “When you get the check, you’ll need to endorse it and send it to the mortgage company. In most cases, the mortgage company will deposit the check and release money to you as the work is done.” The mortgage company may want more before it releases anything, for instance “a list of the work to be done and cost estimates, information about who’s doing the work, and timelines.” Most of that list is your paperwork, so have it ready before the check arrives.

Do not ask for the check

The FTC’s advice to homeowners after weather emergencies says: “Don’t rely on a contractor to tell you what’s covered, and never sign your insurance check over to a contractor.” Its alternative: “Instead, arrange with your bank or credit union for a Certificate of Completion. That way, the bank will pay the contractor for each stage of the job after you have given your approval.”

So a contractor who asks for the check sounds like the one the FTC is describing. Work with the staged release instead, and make each stage easy to approve.

How one large investor’s loans release the money

The release rules come from the loan. One published set is Fannie Mae’s Servicing Guide, which the servicers of loans Fannie Mae owns must follow. Section B-5-01, Insured Loss Events, sets the release by the loan’s status at the time of the loss:

The same section adds details a contractor should know:

• When a current loan needs more than one release, the servicer must “review and approve the final plans for repair, including obtaining the necessary bids to repair the property,” and inspect the repairs as they are completed. “A final inspection is not required.” On a loan 31 days or more delinquent, a final inspection is required.
• On a current loan, if the homeowner has already paid the contractor or bought materials, the servicer may reimburse her “as evidenced by paid receipts,” and “Receipts are not necessary if the loss proceeds are less than or equal to $40,000.”
• On loans current or less than 31 days delinquent at the time of the loss, the servicer may use photos or video sent by the borrower, or a video call, to document the progress of repairs. The conditions include that the photos or video clearly identify the repairs and confirm they were done according to the adjuster’s itemized estimate and the repair plan, so the stage photos you take anyway can do double duty.
• The servicer’s duties include obtaining “the proper lien releases, if applicable.”
• Money not yet released sits in an interest-bearing account for the borrower’s benefit.

Two limits on what this tells you. It covers only loans Fannie Mae owns; other investors, government-backed loans and banks that keep their own loans have their own rules. And “authorized to” is permission, not a promise of speed. The homeowner is the borrower, so she is the one who can ask the servicer for its requirements in writing. Ask her to do it the day the check arrives.

Texas puts deadlines on the lender

Some states regulate the lender’s side as well. Texas Insurance Code Chapter 557 applies to residential real property, which it defines as a single-family house, a duplex, triplex or quadraplex, or a condominium or cooperative unit (§557.001):

• When a lender holds all or part of the proceeds pending repairs, it must tell the insured “each requirement with which the insured must comply for the lender to release the insurance proceeds,” no later than the 10th day after it receives the payment (§557.002).
• No later than the 10th day after the insured asks for a release, the lender must either release the proceeds as requested, if it has received sufficient evidence that its requirements are met, or explain specifically why it refuses and what is still required (§557.003).
• A lender that misses either duty pays the insured interest at 10 percent a year on the proceeds it holds (§557.004), counted from the dates set in §557.005.

TDI’s guide tells homeowners whose mortgage company does not release the money on time to complain to the Texas Attorney General’s Office. In another state, ask the state insurance department whether it has a similar rule rather than assuming one.

Two checks on a replacement cost policy

TDI explains that with a replacement cost policy, “most companies pay with two checks.” The first comes after the adjuster has seen the damage and is “for the estimated cost of repairs, minus depreciation and your deductible.” The insurer pays the amount it kept for depreciation “after it gets the bill for the finished job,” and “You usually must complete repairs within a certain period of time.”

In Texas, the insured “shall pay any deductible applicable to a first-party claim” (Tex. Ins. Code §707.002), and an insurer may hold back the recoverable depreciation until it has reasonable proof the deductible was paid (§707.004; Roofers and Insurance Claims lists what counts as proof). So your final invoice, and the homeowner’s proof that she paid the deductible, are what unlock the last check. Send the invoice the day the work is done; Closing Out a Job covers the walk-through and the final invoice.

A worked example

Say a roofer signs a $16,000 roof replacement. The homeowner has a replacement cost policy and a loan Fannie Mae owns. The insurer approves $16,000, holds back $3,000 of depreciation and subtracts a $2,000 deductible, so its first check is $11,000, payable to the homeowner and the servicer. (The figures are an illustration, not typical amounts.)

• If the loan was current at the time of the storm, the servicer is authorized to release up to the greater of $40,000 or 33% at first. The whole $11,000 is under $40,000, so it can come out in one release once the servicer has what it asks for.
• If the loan was 45 days behind, the servicer is authorized to release 25% of $11,000 at first, or $2,750, which is under the $10,000 cap. The rest would come in pieces of no more than 25% after inspections, ending with a final inspection.
• Either way, the $3,000 of depreciation follows your final bill, and the $2,000 deductible is the homeowner’s to pay you.

The difference between those two cases can be several rounds of inspection before all the money is out, and the contractor usually cannot see which case applies. That is why the contract matters more than the check.

What to put in the contract

1. The homeowner owes the price. Your contract is with the owner. The insurance money is how she pays, not a condition of paying, unless you both agree otherwise in writing.
2. Payment stages that match the release. A deposit your state allows (How Big a Deposit Can You Legally Ask For?), a progress payment at a point the servicer can inspect, and the balance on completion. Getting Paid Faster covers progress payments.
3. The deductible. Say plainly that it is the homeowner’s to pay. In Texas, a contract of $1,000 or more that is reasonably expected to be paid wholly or partly from a property insurance claim must carry a deductible notice in at least 12-point boldfaced type (Tex. Bus. & Com. Code §27.02(b)); Roofers and Insurance Claims quotes it and covers three other states.
4. The paperwork you will supply. An itemized estimate, the scope, your license and insurance, a timeline, photos at each stage, and lien waivers or releases with each payment. Mechanics’ Liens for Small Residential Contractors covers the lien side.
5. Supplements. If the insurer later approves more work, it goes on a signed change order (Change Orders).
6. When each payment is due, in days after each milestone, so a slow release becomes a conversation between the homeowner and her servicer rather than an open-ended wait for you.

A large paper check traveling by mail is also a target for thieves; Check Fraud and Stolen Mail covers protecting customer payments.

General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.