What Is A Mortgagee?

On the path to homeownership, you’ll be exposed to a lot of terminologies that can be difficult to understand. You’ll find some of this lingo in the mortgage contract, which lists the parties involved and the rights and responsibilities of each.

Included in the mortgage contract are the terms “mortgagee” and mortgagor,” which describe the lender and the borrower. Keep reading to find out who the mortgagee is in a mortgage loan relationship, what the mortgagee does and what a mortgagee clause is.

Who Is The Mortgagee?

A mortgagee is a party that lends the money for a mortgage. When you’re buying a home, the mortgagee is the financial institution you get your loan from. This party plays an important role in the home buying process and can be either a bank, credit union or a specialized mortgage originator.

What Does A Mortgagee Do?

The mortgagee is generally involved from the time you get preapproved at the start of the home shopping process all the way through closing day – after they’ve finalized your loan approval. Below we’ll talk about the different responsibilities and tasks the mortgagee is responsible for.

Set Mortgage Rates

The mortgagee is the party responsible for setting interest rates on their loans. Of course, lenders don’t just arbitrarily choose interest rates to attach to loans. Rates are set based on the current market demand and with the help of other mortgage investors (Fannie Mae, Freddie Mac and the Federal Housing Administration). The higher the current interest rate environment, the higher the interest rate a lender may set on their loans.

The mortgage rate a lender sets also depends heavily on the borrower. A mortgagee will offer a better rate to a borrower with excellent credit, while someone with below-average credit may get a higher rate from the mortgagee.

Underwrite Your Mortgage Application

Another important responsibility of the mortgagee is underwriting your mortgage application. When you apply for a home loan, there’s a lengthy underwriting process that your application must go through. During this process, the mortgagee must take steps to ensure you’re qualified for the loan.

As a part of the underwriting process, the mortgagee will work to verify certain parts of your financial situation. First, the lender will run a credit check to make sure you have a sufficient credit score to qualify for the loan, as well as to determine what interest rate you’ll be eligible for.

Next, the mortgagee will verify your employment and income, often by reaching out to your employer and reviewing your pay stubs and tax returns. The lender will also verify your assets and liabilities, including the monthly payments on your other debts.

From this information, the mortgagee will determine your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward debt. Because lenders require that borrowers remain under a certain DTI, your income and debt payments will help determine how much money you can borrow.

A final part of the underwriting process is the appraisal. The appraisal isn’t about looking into your finances but rather the asset you’re trying to buy. A third-party appraiser will determine the value of the home so the lender can be sure they aren’t lending you more money than the home is worth.

Once the mortgagee has completed the underwriting process, they’ll officially approve the mortgage and you can close on your home.

Set Up A Perfected Lien

Another responsibility of the mortgagee is setting up a perfected lien, which is one that has properly secured the lender’s interest in the asset. When a lien is perfected, it means it’s been properly filed and is legally binding.

The lien is designed to protect the lender. It ensures that if you fail to make your monthly mortgage payments, the lender can foreclose on the home.

Generally speaking, a mortgagee will take first priority of the asset, meaning if you have multiple liens on the property, the mortgagee wants first dibs in case you don’t pay back your loan. Part of this process is giving other lenders and creditors notice about the lien.

Sell Or Secure A Seized Home

As we mentioned, a lien gives the mortgagee the right to foreclose on your home if you fail to make your monthly payments. The purpose of seizing the home is to sell it and recoup its losses. For example, if you owe $200,000 and stop making your mortgage payments, your lender will foreclose on the home and sell it to get its $200,000 back.

What’s The Difference Between A Mortgagee And Mortgagor?

A mortgagee is one of the two key parties in a mortgage loan. The other party is the mortgagor, who is the borrower who applies for the mortgage.

Just like the mortgagee, the mortgagor also has certain rights and responsibilities under the contract. First – and perhaps most importantly – the mortgagor has the responsibility of making their mortgage payments. If you don’t, you’ll be in breach of your contract and could risk losing your home.

The good news is the mortgage contract also gives you, the mortgagor, some rights. For example, even though the mortgagee has a lien on your home for as long as you have the mortgage, that lender can’t take your home as long as you’re upholding your responsibilities.

Depending on your mortgage agreement, you as the mortgagor may also have other rights, including a certain interest rate, set monthly payments or the ability to have private mortgage insurance (PMI) removed from your payments once you’ve reached a certain amount of equity in the home.

What Is A Mortgagee Clause?

A mortgagee clause is a provision in a property insurance policy that protects the mortgage lender’s interest in the property. Mortgagee clauses are an important part of the home buying process and are almost always required by lenders.

Rather than being an agreement between the mortgagee and the mortgagor, the mortgagee clause is an agreement between the mortgagee and the homeowners insurance company. The purpose of this agreement is to ensure that if the home is damaged, it’s not just the homeowner who is compensated for the losses. The lender wants to make sure their investment is protected.

For example, let’s say your home is destroyed by a fire. Because of the mortgagee clause, the homeowners insurance company will send a part of the check directly to the lender to pay off what you owe on the home.

The mortgagee clause also states that it must be compensated for the damage that may not necessarily be covered by insurance. For example, if it turns out you burned your house down intentionally, the insurance company wouldn’t normally cover the damages. However, the mortgagee clause ensures the lender will still get its money.

Finally, the mortgagee clause requires that an insurance company notify the lender if the policy is canceled, either by the insured or the insurer. This part of the agreement also protects the mortgagee since most loan agreements include a requirement that the borrower have property insurance at all times.

The Bottom Line

A mortgagee is one of the two key parties in a mortgage loan. While the mortgagor is the home buyer who borrows the money, the mortgagee is the lender who underwrites the loan. Mortgagees have several responsibilities in the home buying process, as well as a right to seize a home when the mortgagor has stopped making their mortgage payments.

Are you in the market for a home? Get started on the mortgage process to see if you qualify.