Gelt Financial president H. Jack Miller featured real estate expert on U.S. News & World Report
Gelt Financial president H. Jack Miller was recently featured as a real estate expert in the feature “What Happens to My Mortgage If My Lender Goes Bankrupt?” on U.S. News & World Report.
When you hear about banks and financial institutions going out of business, you may wonder what happens if your mortgage lender goes bankrupt. The good news is that it should be a simple transition.
“In most cases, your mortgage will be sold or transferred to another financial institution, which should be relatively seamless on your end,” says Leslie H. Tayne, founder and head attorney at Tayne Law Group, P.C.
In fact, it’s not at all uncommon for your loan servicer to change during your mortgage term, according to the Federal Trade Commission – bankruptcy is just one of the reasons why it might happen.
Learn more about what to expect if your mortgage lender or servicer goes bankrupt, how to proactively handle the change and which group of people might be impacted the most.
What Happens to My Mortgage If My Lender Goes Bankrupt?
The first thing to understand is the distinction between mortgage lender and the mortgage servicer, since they are not always the same, says H. Jack Miller, real estate investor and strategic financing advisor at Real Estate Bees, a platform for real estate professionals. The lender owns the loan while the servicer manages the escrow account and handles the payments and account activity.
“There may be things that the borrower may have to do on their end to reflect the new servicer or lender, but all of the existing terms and conditions such as interest rates and payment amounts remain in place,” says Miller.
Here are three key things to know if your lender or servicer goes bankrupt:
- You’ll get advanced notice. If a lender goes bankrupt, you are legally supposed to receive notification of the change at least 15 days before the effective date of the transfer of the servicing of the mortgage loan. In fact, you should hear from both your current lender and the new one regarding important information like where to send your future mortgage payments and who to contact for customer service, says Tayne.
- You have a grace period. During the transition, you might be nervous about where to send your payment if the transfer dates don’t line up with your mortgage due date – but don’t worry. According to a Consumer Financial Protection Bureau spokesperson, “you have a 60 day grace period where any payments made to the old servicer will be transferred.”
- Your payment is still due. Don’t be tempted to skip a payment or be fooled into thinking payments are paused because your lender goes bankrupt. “Regardless of your current lender’s financial situation, you are still obligated to make your mortgage payments,” says Tayne.
What You May Have To Do If Your Mortgage Lender Goes Bankrupt
If things happen smoothly, your mortgage lender or servicer going bankrupt really shouldn’t have a big impact on you. That said, it’s important to be diligent.
“If you receive notice that your mortgage lender or servicer is going out of business, be sure to pay close attention to your mail, phone calls and email, as there could be important follow-up information about the status of your loan,” says Tayne. For example, you may receive instructions about how to create a new online profile on the new lender’s website and update any bill-pay information you have set up.
If you’re someone who is not tech-savvy, you may opt to get in touch with the new servicer by phone to see if you can request a new payment coupon book. Otherwise, as long as you have the new payment mailing address – which should be included in the information letter you receive – begin sending your payment there.
Once your new account is set up, do some due diligence to make sure everything looks correct and your first payment or two has been posted. “The escrows will be transferred over to the new company, too,” says Miller, “but I would make sure it happens and applies correctly.”
If There’s a Problem With the Transfer
The CFPB spokesperson said the Bureau is working to improve mortgage transitions, pointing out that the best servicers are able to transfer over everything, including payment information, so the consumer doesn’t have to be inconvenienced at all.
That isn’t always the case, though, and bankruptcies can create confusion for some customers. In those cases, the CFPB encourages homeowners to use its complaint tool to report any problems they have, such as unclear instructions, unresponsiveness, or being told they should make mortgage payments to both companies in the same month (which would never be required).
If You’re in the Middle of the Homebuying Process
While current homeowners typically have little to no hassles if their lenders or servicers go bankrupt, for people with a pending mortgage who are waiting for closing, a bankruptcy could be more disruptive.
In the best-case scenario (if you’ve been approved already), everything, including the escrow, can simply transfer over to the company that is taking over the business, says the CFPB spokesperson. You may just have to jump through a few extra underwriting hoops with the new lender.
However, Tayne says, it can get more complicated than that if you end up having to find a new lender. “It could disrupt closing on a home.”
Miller agrees. “If I were a borrower and my lender is going out of business or on shaky ground, I would assume they’re not going to close the loan and I would apply with a different lender as soon as possible.”
