I have never heard of a mortgage keeping funds from an customer insurance check to repair while the account is in forbearance. That would be a legal question for an attorney based on the language in the mortgage agreement. In California, that may be considered “Bad Faith.” Mortgage agreements have their own language on how funds can be used when receiving a check from an insurance claim. Mortgage agreements are different in each state.
Mortgage lenders have an equal right to the insurance check to ensure repairs are made. Insurance companies generally include the mortgage company name on the check, along with the property owner’s name. This is because both parties have an interest in the property.
In some cases, a lender may disburse funds for the repairs and restoration in a single payment. In many cases, they will make a series of payments as the work is completed. The mortgage company will monitor the repairs. The mortgage company will also set up an escrow account for deposits and payments. Funds will be released based on the percentage of work completed to the property.
The lender will request a copy of the insurance estimate and your contractor’s estimate. They will also request the contractor provide a W-9 tax form. In most cases, a mortgage company would release the funds in three installments.
The first initial payment is usually around 30%, so that you can start the work. Once you have reached the 50% mark in repairs, call your mortgage company for inspection so they can confirm the work has been completed. Once your mortgage confirms the repairs, they will release another 30% of the funds in the escrow account.
Finally, when your contractor completes 90-95% of the repairs, call your mortgage company back for a final inspection. They will confirm the work has been completed by an inspection and release the final funds. In theory, the mortgage company wants to protect its interest and ensure that the property is restored to pre-loss condition.
As far as Texas, The Texas Insurance Code contains a section devoted entirely to insurance proceeds held by a mortgage company or lender pending repairs of real property. That provision within the Texas Insurance Code states that if a mortgage company holds all or part of the proceeds from the insurance claim payment pending completion of repairs, the lender shall “notify the insured of each requirement with which the insured must comply for the lender to release the insurance proceeds.” The mortgage company is required to provide this information to the property owner within 10 days of receiving the insurance payment.
This means that if the mortgage company has not notified you of its requirements to release the funds, then technically the mortgage company may have violated the Texas Insurance Code law. Again, please confirm with an attorney regarding the law in each state.