Figuring out what you owe on your home loan can be harder than a calculus exam.
For most people, their mortgage is their biggest debt. And their home is their most important asset.
Yet, the people accounting for your payments are increasingly incapable of the very basics of their job. And that makes your job, as borrower and homeowner, more challenging.
Not your parents’ home loan
Things have changed since the local bank made you a loan to buy a house and collected the payments you made on that loan.
Now, home loans get sold to someone else the moment the deal closes. The right to collect the loan payments is bought and sold separately from the right to the payment amount.
And increasingly, the servicers make mistakes as they cut corners to make a buck.
What do you need to know to assess whether your loan servicer has got the numbers right?
1. Principal balance isn’t what you owe
Ask someone what they owe on their mortgage and they’ll recite the principal balance. The principal balance is the remaining part of the amount originally borrowed that is still unpaid.
Yet you may well owe additional sums: delinquent payments that are mostly interest; late fees; escrow advances; or the junk fees that most delinquent loans are larded with.
Finding the principal balance gets trickier yet if the loan has been modified to include a non-interest bearing amount or some other, non standard adjustment.
So the amount necessary to pay off the loan upon sale, or refinance, may well include charges from the past plus fees for calculating what you need to pay to satisfy the debt.
2. Payments are credited to oldest month unpaid
If you fall behind on a home loan, then resume making payments, your payment is credited to the oldest month still unpaid.
So the payment you make in June may be credited to February.
And the servicer will report that you remain due for June, even though you sent a check in June. It’s all in the rules about how payments are credited under the terms of the note.
3. Payments may not be credited
Loan servicers seem to have a separate “pocket” labeled “Suspense” into which they sometimes dump your payment. They’ve got your money, they just haven’t credited it to the amount you owe.
The only reason for putting funds in suspense that seems justified is when the payment is too little to make a full payment on the loan. Servicers don’t have to credit partial payments.
So, they put the money in suspense until they receive enough money to make the regular payment.
For reasons no servicer has ever adequately explained, I’ve seen suspense accounts in the tens or even a hundred thousand dollars.
So, a mortgage statement that doesn’t address any funds held in suspense doesn’t tell the whole story.
4. Escrow accounts contain something extra
If your 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 1/6 th of the annual expenditures. It remains your money, it’s just held by the servicer should it have to pay when you haven’t paid.
You should 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
Ever since loans were 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 pays a company to deposit your payments, keep track of fees and expenses, and take action if you don’t pay.
The servicer seldom owns the note, they just own the right to collect the money.
And servicers change. Sometimes as often as we change the oil in our car.
When there’s a loan handoff from one servicer to a new servicer, details about anything unusual in the loan account sometimes get lost.
Get behind the 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 clout.
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 hands, the borrower has a window in which to request information from the old servicer, to compare with what the new servicer thinks.