A loss draft is a check from your homeowner’s insurance that covers property damage, such as from fire, storms, or leaks, but it’s made payable to both you and your mortgage lender. The lender’s involvement ensures that insurance funds are used specifically for repairs that protect the mortgage collateral — your home.
When you signed your mortgage agreement, it required you to carry insurance with the lender named as the loss payee, giving them a legal interest in the insurance proceeds. This means when your insurer issues the loss draft, the lender must endorse the check alongside you, so the funds can be carefully managed.
Why Do Lenders Require Loss Draft Checks?
The lender’s goal is to safeguard their financial stake. If damage lowers your home’s value, the lender wants to ensure repairs restore it before you receive any funds. Without this process, insurance money might not be used for repairs, risking the lender’s collateral.
How the Loss Draft Process Works
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File an Insurance Claim: You notify your insurer about the damage, and an adjuster assesses repair costs.
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Receive the Loss Draft: The insurer sends a check payable jointly to you and your mortgage company.
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Contact Your Lender: Get in touch with your mortgage servicer’s loss draft or insurance claim department for instructions.
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Complete Required Paperwork: You’ll need to endorse the check, provide contractor details, and submit documents like waivers and permits.
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Funds Held in Escrow: The lender deposits the funds into a restricted account and releases payments in stages as repairs progress. Inspections often verify completed work before each disbursement.
Managing Claim Amounts
Lenders may handle funds differently based on claim size:
- Smaller Claims (typically under $10,000): The lender might simply endorse and release funds to you.
- Moderate Claims ($10,000-$40,000): Funds are usually disbursed in 2-3 payments tied to repair milestones.
- Large Claims (over $40,000): Multiple inspections and staged payments ensure careful oversight.
Tips for Homeowners
- Contact your lender promptly upon receiving the loss draft.
- Keep an organized record of all insurance and repair documents.
- Choose a licensed, experienced contractor familiar with loss draft procedures.
- Maintain clear communication with both your lender and contractor.
Common Misunderstandings About Loss Drafts
- The lender is not withholding your money for profit but managing it to protect all parties.
- The process is a mortgage contract requirement, not optional.
- You may receive leftover funds after verified repair completion.
Understanding the loss draft process helps you navigate home insurance claims while satisfying mortgage obligations, ensuring your property is restored without unexpected complications.
For more details on mortgage-related topics, see our article on Mortgage Lien Subordination.
References:
- Consumer Financial Protection Bureau, “What happens when my homeowner’s insurance company sends me a check for repairs?“
- IRS Publication on Escrow Accounts and Homeowner Insurance (for additional background)
- Investopedia: Loss Payee Definition
- Forbes: What Is A Loss Draft In Homeowners Insurance?
External authority: For official guidance, visit IRS.gov and ConsumerFinance.gov.
