How Is Your Mortgage Company Applying Your Payments?

24 Apr How Is Your Mortgage Company Applying Your Payments?

Yesterday I sat down with some clients to try and figure out what was going on with their mortgage.  My clients say they made all the payments, but the mortgage company shows that they are two months behind.  After extensive review of the clients’ receipts and the mortgage company’s payment history (which is no picnic, let me tell you), I could not find a discrepancy in payments.  All the clients’ payments had been credited, the numbers added up, and yet the mortgage company still maintains the payments are past due.  Then, my client said “I even paid it early,” and the light dawned.  The source of the problem, it turns out, is how the payments were applied.

A while back, my client was facing surgery, and knew that income would be interrupted.  To try and avoid getting behind, for two months before the surgery my clients sent double payments.  What they didn’t understand is how the mortgage company would apply those payments.  When the mortgage company received those double payments, instead of applying the payments to the current month and the following month, they applied a payment to the current month, and applied the balance to reduce the principal balance of the loan.  The same thing happened the next month.  So, while my clients thought they were making four monthly installment payments, the mortgage company applied two monthly payments, and applied the balance to principal reduction.  The mortgage company was still looking for monthly payments for those other two months.  Although money was sent and applied to the loan, with the best of intentions, my clients had gotten behind.

The application of “extra” payments in this fashion is the norm in the mortgage industry.  In fact, in most cases, the debtor benefits from application of excess payments to principal.  Many of us (myself included) send additional money with each mortgage payment to reduce principal.  Over the life of a mortgage, it can save you thousands in interest.  The problem comes when you try to pay installments ahead, especially with no specific communication with the lender that such is your intent.

If you have a need to pay installments ahead, it might be possible to make arrangements with your lender to do so, though I would hesitate to rely on that.  It will create accounting issues, and if the excess is applied to principal, it may be very difficult to get the lender to reverse that application.  If you are like my clients, and just need to provide for payments during a short-term interruption in income, for my money the best idea is to sock the money away in a savings account, and use the savings to pay the payments.

And by all means, when you can, pay some extra towards principal.  Just make sure you understand how your lender is applying your payments, and don’t assume those extra payments will count toward your monthly installments.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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