Was it legal for the seller’s mortgage company to keep the insurance claims check on the home we bought?

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Was it legal for the seller’s mortgage company to keep the insurance claims check on the home we bought?

We recently purchased a short sale home. The roof had hail damage so the homeowner filed a claim to have it fixed. The check was made out to the mortgage company and the homeowner. Right at closing the mortgage company informed us they would not release the check and instead would keep the insurance money because the homeowner was had defaulted on her loan. Our only choice was to back out on closing day or continue and with the home and not have the roof fixed. Was this legal?

Asked on December 14, 2011 under Real Estate Law, Texas

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Under most mortgages, the lender is entitled to have the security protected for the loan through insurance. If the loan is in default and there is an insurance claim pending regarding the property secured by the mortgage, the insurance company by the agreement that it has with the initial borrower is entitled to receive all insurance proceeds to cure any default.

What you have written about is allowed under contract law. Hopefully the price paid for the property by you was enough below market value to take into consideration the roof that you will have to repair out of your own funds.


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