Can Mortgage Lenders Hold Your Insurance Money Hostage?

"If the borrower [in default] is still living in the home and is making progress toward repayment and the investor is OK with it, we will release the insurance benefits so repairs can begin," says Northagen.

"If the borrower is severely delinquent, we handle the situation on a case-by-case basis. We try to work with our customers, but ultimately, if the borrower is not cooperating and not returning messages or is no longer living in the home, the servicer may ask to have the insurance proceeds applied to the loan balance. However, this happens in a relatively small number of cases."

Getting help

Barry says that homeowners who are having trouble accessing insurance funds should go directly to their mortgage lender rather than to their insurance company.

"When you have a loss, it's always a good idea to notify your lender so that it's not a surprise," he says. "It's better if you tell them what happened rather than them hearing it from the insurance company."

(Note: Investigations are still ongoing into why certain Texas homeowners had their insurance money applied to their mortgage balance instead of towards rebuilding. We'll be sure to update this story when we learn more.)

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