The bank owns your home until the mortgage is paid off.
If you suffer a loss to your home from a fire, you want to get back into your home as quickly and easily as possible. This won't be easy, because chances are you must work with your insurance company, mortgage lender and contractors simultaneously, all while dealing with your everyday needs. Your mortgage lender is a party to all repair settlements from the insurer.
Two-Party Checks
Until your mortgage is paid off, your lender has a right to be a party on all insurance settlement checks relating to the repair or replacement of your home. This means that your insurer will not only send the money to the lender, but the check itself will have the lender's information on it. The lender must approve the purpose for which the money is spent and endorse the check in order for a bank to cash it.
Release of Money
The bank knows that you need some money to begin repairs, so typically the lender will release some of the settlement for this purpose. However, lenders also commonly hold a portion of the settlement until the work is completed. They do this to ensure that their financial interest in your home is being met. If they give you the money and you flee without completing repairs, they are left with a damaged home and a pile of unpaid debt.
Direct Payment
Even if the mortgage company releases the settlement money in a fair and timely manner, you may never see any of it. To guarantee payment for repairs, lenders often arrange direct payment relationships with contractors. You may have to visit your lender to sign papers or endorse checks, but the money may never actually end up in your account. If you paid a contractor with your own money, the lender may release the settlement money to you as reimbursement, if it approves the initial expenses.
Other Settlements
Homeowner's insurance contains other types of coverage besides repair money. If your home is uninhabitable after a loss, your policy likely pays the additional living expenses you incur while your home is repaired. Because this money is not tied to your mortgage, your insurer may send it directly to you, or arrange direct payment relationships with the hotel or other places you must stay in the meantime. Your lender may not be a party to this money at all.
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