The mortgage company is trying to force us to make repairs after an insurance claim
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?
Let’s illustrate how typical mortgage and its insurance works, from the very beginning.
few years pass
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.
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.
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.
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:
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.
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.