Most residential real estate transactions involve a mortgagee. A mortgagee is the financial institution that loans the money to enable the homeowner to purchase the real estate. The mortgagee is a creditor of the homeowner. When the mortgagee lends the funds, it takes back a security interest in the real estate. As a secured creditor, the mortgagee is entitled to protect its interest in the real estate to the extent of the unpaid balance of the mortgage. Typically, this is accomplished through an insurance policy. Although homeowner's insurance is usually purchased with the idea of protecting the owner's interest in the real estate, the structure on it, and its contents, homeowner's insurance also protects the mortgagee through the addition of a mortgagee clause.
A mortgagee clause is a portion of a homeowner's insurance policy that names the lender as a co-insured with the homeowner. The clause typically provides that, in case of a loss, the proceeds from the insurance policy will go to the mortgagee first so that the remaining balance of the mortgage is paid off. If the homeowner has obtained a second mortgage or has otherwise assigned interests in the real estate to other creditors, the second mortgagee and creditors will be paid next, usually in the order that their debt became secured by the real estate. Any proceeds remaining will be paid to the homeowner.
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