Antonio Guillem/Shutterstock
Key takeaways
- If you have an existing mortgage, and your mortgage company goes bankrupt, your loan will be sold to another company.
- If your loan has been sold, continue to make your mortgage payments. The terms of your loan will remain the same.
- If you’re in the midst of closing a loan, and the lender goes bankrupt, any escrow funds should be safe, but you’ll have to find a new lender.
Like any other business, banks and mortgage companies can fail or go bankrupt, sending shock waves throughout the financial system. Case in point: the March 2023 banking crisis, when the failure of first Silicon Valley Bank and then Signature Bank led to sharp drops in the stock market and mortgage rates. But what about your personal finances, should your mortgage lender go bankrupt? That depends on where you are in the loan process.
What happens if your mortgage company goes bankrupt?
If your mortgage lender goes bankrupt before your loan closes, you’ll have to find a new lender. But if you already have an existing mortgage, and your servicer goes bankrupt, there’s very little you need to do other than continuing to make on-time payments.
When your mortgage lender goes bankrupt before the closing
If your mortgage lender goes bankrupt before your scheduled closing, don’t panic. “Any funds you have transferred to an escrow agent should be secure if your prospective lender gets into trouble,” says Bruce Ailion, an Atlanta-based real estate agent and real estate attorney. However, you will need to act quickly to keep your loan on track.
- Find a new lender. The bankrupt lender will likely cease to underwrite loans, so you’ll need to find a new one. If you sought preapproval from multiple lenders, it may be easiest to contact one who already has your information.
- Continue the loan process with your new lender. If your financing has already been approved, it likely won’t be hard to find a lender who’ll take on your loan, thanks to today’s standardized underwriting guidelines and methods. “Usually, a buyer can scramble and find another lender to close their loan unless their lender took in business others would not do at rates others would not meet to try to stay afloat,” Ailion says.
While it may not be hard to find a new lender, you’ll need to do it fast. It typically takes three to six weeks to process and approve a loan, says Ailion. And switching lenders could impact your closing date — which may be a problem for your sellers.
Your best bet is to communicate early and often with your buyer’s agent, who can negotiate any needed changes with the sellers and their agent.
When your mortgage lender goes bankrupt after your loan closes
If your loan servicer goes bankrupt after you close, it won’t impact you or your loan terms. In fact, you might not even know about the failure while it’s happening.
Here’s the standard procedure when a servicer goes bankrupt:
- Governing agency steps in. If an insured bank or credit union goes into bankruptcy, its governing agency comes in to manage the company’s assets, including mortgages. For banks, this is the Federal Deposit Insurance Corporation (FDIC). For credit unions, it’s the National Credit Union Administration (NCUA).
- A new lender takes over. This takeover typically ends with the agency inducing another lender to take on the failed one’s loans. This company may retain your mortgage or sell it. You must receive notification of the transfer within 30 days of the transfer date, according to the Consumer Financial Protection Bureau (CFPB). You’ll typically get a letter from both the old servicer and the new servicer, which will include information about where to send your payment. Your new servicer will receive all the details about your loan, including your payment history.
Throughout this process, your responsibilities remain unchanged. Your mortgage balance does not change, and your amortization also remains the same. You’ll still be required to pay your mortgage on time, pay your taxes and maintain property insurance.
Do you still pay your mortgage if your lender goes bankrupt?
Yes, even if your lender goes bankrupt, you still have to pay your mortgage. As part of the bankruptcy proceedings, your loan will likely be sold off to another company, and they’ll expect you to continue payments.
If you do stop paying your mortgage, you could put yourself at risk of foreclosure by whoever winds up owning your loan after the mortgage lender’s bankruptcy proceedings. They might cut you a little slack if a payment is late, given the delays that can happen during a changeover; grace periods are standard. But don’t try to take advantage of the situation by deliberately being tardy or making incomplete payments.
How to find out who holds your mortgage
If you’re unsure who owns your mortgage, you can look your loan up online via Fannie Mae or Freddie Mac. Any account statements you receive — via mail or online — should also include the name of your servicer and a contact number. Don’t be surprised if the name is different from that of the institution that originally approved your loan. Mortgages change hands all the time.
Other reasons your mortgage could be sold
Bankruptcies aren’t the only reason your mortgage could be sold. There are limits that restrict how much a bank is able to loan based on its deposits. If the bank needs to balance its books, it could sell off your mortgage to make room for additional loans and credit lines. Or it could do so simply to raise capital or ready cash. In fact, the majority of loan originators — the institutions that actually give you the funds — sell their mortgage debt.
How to deal with your new mortgage lender
If you learn that your loan has changed hands, there are a few steps you can take to ensure the process goes smoothly:
- Keep making payments. Even while its ownership is in flux, your obligation to pay your mortgage remains the same. If you don’t, you’ll give your new lender grounds to foreclose.
- Call your lender: It’s a good idea to check in with your lender to find out more about the change and any updated policies or procedures surrounding making mortgage payments. Make sure that your account is current as well, and that no payments you made during the handover were lost in transit.
- Set up a new online account: You may need to set-up autopay or a new online account. If you prefer to mail payments, confirm the new lender’s address. Then ensure your first payment or two goes through correctly.
If your existing mortgage servicer fails or files for bankruptcy, very little should change for you personally. All of your loan terms — your interest rate, monthly payment and remaining balance — will remain the same. But you will need to do a little administrative work to set up your new account. You might also consider hanging onto your original loan documents and the final statements from your old lender, for easy comparison — just in case.
Additional reporting by Taylor Freitas
Read the full article here
