How Do Mortgage Payments Work?
Figuring out what you owe on your mortgage can be very difficult, especially when you likely have to go in circles with your loan servicer to get a competent person to answer the phone with regard to how your mortgage payments work. I discussed this topic on 1150AM KKNW recently and you can listen to the entire conversation here:
For most people, their mortgage is their biggest debt that they will ever have and their home is their most important and expensive asset that they will ever own. Surprisingly, the people accounting for your payments are increasingly incapable of the very basics of their job. These days, it is very common for home loans to get sold to another owner the moment the deal closes. It is even more common for your note to get sold into a trust with many other loans without you having a say in the matter. The right to collect the loan payments is bought and sold separately from the right to the payment amount which is usually handled by a separate loan services.
Increasingly, the servicers are making mistakes as they cut corners for the almighty dollar at your expense and it not uncommon for your services to change several times over the lifetime of the loan.
So what do you need to know to assess whether your loan servicer has got the numbers right?
1. Principal balance isn’t always what you owe
For most people if you ask somebody what they owe on their mortgage they will recite the principal balance. The principal balance is the remaining part of the amount originally borrowed that is still unpaid. With that said, it’s possible you owe other fee’s that you may not be aware of such as delinquent payments that are mostly interest, late fees, escrow advances, or junk fees that most delinquent loans consist of in the form of penalties.
Finding the principal balance gets even trickier if the loan has been modified to include a non-interest bearing amount or some other out of the ordinary adjustment. So the amount necessary to pay off the loan upon sale, or refinance, may very well include charges from past delinquencies plus fees for calculating what you need to pay to satisfy the debt in full.
2. Payments are credited to oldest month unpaid
If you fall behind on a mortgage, then resume making payments, your payment will likely be credited to the oldest month still unpaid.
So the payment you make in March 2017 may be credited to July 2016 if you missed a payment back in July 2016. The servicer will then report that you remain due for July 2016, even though you sent a check in March 2017. It’s all in the rules about how payments are credited under the terms of the note that you signed when you closed on your home and financing documents that you probably did not read closely at that time.
3. Payments may not be credited
Loan servicers usually have a separate super secret account labeled “Suspense” into which they sometimes dump your payment. Of course they don’t tell you this when you sign your loan documents. The bank usually has your money, they just haven’t credited it to the amount you owe when the funds are in a suspense account.
Usually the only reason for putting funds in a suspense account is when the payment submitted is too little to make a full payment on the monthly loan amount. Servicers are not required to credit partial payments to your account. Therefore, they put the money in suspense until they receive enough money to make the usual payment. Suspense accounts can often contain errors of unapplied funds in the tens or even a hundred thousand dollars so this is the first place I would check if it looks like you are being reported delinquent on a mortgage payment. Therefore, a mortgage statement that doesn’t address any funds held in suspense would not tell the whole story.
4. Escrow accounts contain something extra
If your local property taxes and hazard insurance are paid by the lender, you have an escrow account. Under federal law, the lender is allowed to collect more than the sum of the year’s taxes and insurance as protection against the borrower’s non payment. The extra money, the “cushion”, can be no more than 1/6th of the annual expenditures. It remains your money, it’s just held by the servicer should the servicer have to make the payment on your behalf should you not be able to pay.
You should also get an annual escrow analysis that shows income and expenses in the past year’s escrow account and a projection of the coming year’s expenses. That projection will determine what you pay in escrow payments going forward.
5. Statement doesn’t come from owner of note
Now that it is common for loans to be bundled up and sold on Wall Street to investment trusts, the work of collecting your payments has been handed off to loan “servicers”. The owner of the note (likely a trust) pays a company to deposit your payments, keep track of fees and expenses, and take action if you don’t pay. The servicer rarely owns the note, they just have the right to collect the money.
Servicers change and they change quite often. When there’s a loan handoff from one servicer to a new servicer, details about anything unusual in the loan account sometimes gets lost. You should review your monthly statement. The problem of finding out what the servicer thinks you owe became such a problem that regulations written pursuant to the Dodd-Frank act gave borrowers some protection. Now, a borrower with a home loan can make a Request For Information about their loan and expect answers within a shorter period than under the old law.
If the servicing of the loan has changed to a new company, the borrower has a window in which to request information from the old servicer, to compare with what the new servicer thinks.
If you live in Washington State and are looking for assistance with a loan modification or foreclosure defense, give Symmes Law Group a call at 206-682-7975 to speak to a bankruptcy attorney and learn about your options.