Like any other business, banks and mortgage company are subject to closure or bankruptcy. Even while it doesn’t happen frequently, when it does, the financial industry can be rocked. Consider the financial crisis that occurred during the weekend of March 10, when the failure of Silicon Valley Bank and later Signature Bank caused the stock market and mortgage rates to drop significantly.
It’s understandable to ask what will happen to you if your mortgage company file for bankruptcy and to your loan. Depending on exactly where you were in the mortgage process, the consequences will change.
What happens if your mortgage company goes bankrupt?
What might the demise of a mortgage firm entail for your own financial situation? You may be asking if that offers you a free pass to avoid going to jail. Sadly, the response is no. Your loan payment obligations will not change.
In general, your loan shouldn’t be impacted at all if it was closed before the bankruptcy happened and you have the money. Typically, another institution will assume the debt as part of the bankruptcy procedure. The good news is that your previous repayments won’t be “lost” or removed from the books. The new financial institution or loan servicer will receive complete access to the details of your previous mortgage transactions.
When your mortgage lender goes bankrupt after your loan closes
If your mortgage lender files for bankruptcy or ceases to operate, whether it be the company that originated the loan or a different party that later acquired it, it should have no effect on you or your loan due to the way your mortgage is handled after closing.
The servicing of the debt would be the new owner’s obligation if another bank or lender decided to take over your mortgage. According to Atlanta-based real estate lawyer and Realtor Bruce Ailion, the servicer or institutional investor looking after your loan is generally unlikely to file for bankruptcy.
Both the previous servicer and the new servicer will send you a notification confirming the change if your loan’s servicer changes. You can find instructions on where to send your payment in this notice.
When your mortgage company goes bankrupt before the closing
You learn that your lender is in serious financial trouble as you’re getting ready to close on your mortgage. Do you need to start perspiring?
The quick response is no. “Any funds you have transferred to an escrow agent should be secure if your prospective lender gets into trouble,” says Ailion, “but you will have to find a new lender to get a loan.”
Typically, a mortgage lender will stop underwriting loans if company is about to fail. However, if your financing has already been approved, finding a new lender may not be too difficult now that underwriting standards have become more uniform.
Do you still pay your mortgage lender if it goes bankrupt?
You still have to make your mortgage payments even if your lender files for bankruptcy. Your loan will probably be handed off to a different company as part of the bankruptcy proceedings, and they’ll want you to keep making payments.
If you do decide to stop making your mortgage payments, you run the danger of having your home foreclosed upon by whoever inherits your loan once the bankruptcy process is over. Given the delays that can occur during a changeover, they can give you a little leeway if a payment is late; grace periods are common. But avoid purposefully being late in an attempt to capitalize on the circumstance.
Again, nothing should change for you personally if your mortgage lender fails or files for bankruptcy. Your loan’s terms, including its interest rate, monthly payment, and outstanding balance, won’t change at all. However, double check the address and the payment method when you speak with the new lender. If you use auto-pay, you may need to adjust a few things. Additionally, make sure your account is up to date. You should send any payments you’ve made to the new lender during the handover in order to prevent anything from getting lost in transit.
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