They Told Me Not To Make My Loan Payment

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I've heard this story, in all of its variations, at least hundreds of times.

Someone will send me an email and say "They told me not to make my loan payment because I was going to skip one. So I spent the money on something else. Now they're telling me they can't fund my loan and I can't come up with the cash to make this month's payment!"

First off, engrave this into your soul: You will never skip a mortgage payment. The interest accrues every month and it must be paid every month. What many loan providers do is plan to add an amount equal to your monthly interest charges to your loan balance. This gives the illusion of skipping that payment, but you not only made the payment, you're now paying interest on the extra amount you borrowed.

I never tell people not to make their loan payment. At most I will tell them to wait a few days to give the loan a chance to fund. This lets them know it is still a concern, still an item they need to stay on top of. This way, if there's a funding issue they still have the ability to make their payment. I'm pretty certain I've never had a funding issue like that, but I'm also certain if I said anything different, the universe would bite both me and my next client. The universe is hostile and you always want a Plan B (and Plan C if practical).

Here's how it works: At the end of every month, you've got a fifteen day grace period to make your payment (i.e. by the 15th of the following month) before any penalties begin. So if your new loan was funded any time prior to the 16th, everything is at least under control. If you pretend you're skipping a month's payment, you've just added an amount roughly equal to the principle you pay in six months back into your loan (on top of all the other closing costs if you didn't pay them in with cash out of your bank account)

So quite predictably what happens is at the end of every month there is a massive wave of loan fundings to take advantage of this as unscrupulous loan officers pretend this month is free. Escrow gets so busy at that time of month that things get lost in the shuffle quite often. It's for this reason that I prefer to avoid funding loans in the last two or three business days of a month. If you're not trying to pretend your client is skipping a payment that they aren't skipping, things become much easier.

Let's say we fund your loan on the 28th of the month. Actually, this works anytime between the first of the month and the 15th of the next month, but the last few days of the month is typical. You can pay for the interest due in cash or by rolling it into your new mortgage. Either way will get the job done. It depends upon which is more important to you: having the cash from pretending you didn't need to make a payment, or not losing about six months worth of principle payments. By paying this interest, in either case you are covering the payment that would be due for that month.

Here's where it gets a little tricky, but not much. If you fund on the first of a new month or before, the interest paid is for the ending month, and the new loan starts accruing interest immediately. There will be a payment due at the end of that month. If you fund from the second to the fifteenth of the new month, the new loan needs to cover the interest for two months (either by rolling it into your balance, paying it cash, or some combination). In this case, the new loan (or cash you put into the deal) covers the ending month and the new month just beginning. It's also for twice as much money, by the way. This is why some very unscrupulous loan officers can advertise "Skip two payments!" even though there is never a single second on any loan when it is not accruing interest.

As long as everything goes well enough for the new loan to fund by the 15th of the new month, everything is at least under control. Yeah, you might have chosen to roll all the costs into the new loan but that's okay as long as you go into it with your eyes open having made a conscious choice.

But what happens if they tell you "Don't worry about your loan payment!" and then it doesn't fund? (or doesn't fund in time!)

Well, problems. If you're fifteen days late on your mortgage, expect to get hit with a penalty of at least 4% and more likely 6%. Work out the interest rate, and you'll see the interest rate on payments late that sixteenth of the month is 96 to 144 percent!

If that were all there were, that would be bad enough but livable. Usually it puts people a full month behind on their old mortgage. That noise you just heard was your credit score being nuked. I have seen a single 30 day late make a difference of 150 points on the Fair-Issacsson (FICO) model. Plus if you think you had difficulty qualifying for a prime mortgage before, wait until you see what happens after you've got a thirty day late! This usually ends up becoming what subprime calls a "rolling thirty" for several months until you get the extra money from some other source, but A paper (i.e. the good loans) doesn't have a "rolling thirty" category - every single one of those late payments hits you again as yet another late payment within the past 24 months.

Then there's the problem of where you've going to get the money to replace what you've spent because you were told you didn't have to make a payment this month. It's not coming out of some hyperspatial vortex. My clients would have to get it from somewhere. What if they really don't have it?

This sorry little charade that many loan providers play even has an ultimate downside. There is no need to skip a month's payment. You, the client, will get full and complete credit for any cash you put into the transaction or your loan. It may take a little while to get back to you, but you will get it. In the meantime, however, it may spell difficulty for your cash flow. You made that payment but your old lender hasn't yet credited it (or it cannot be confirmed that you made the payment)? You will get the money back when the accounting all finalizes. The reason we tell people they might want to hold off is that quite often it takes a few days between mailing the check off and the time that the old lender admits that they got it. You can't close the old loan off unless you pay the full amount the old lender is asking for right now. If you can't close the old loan off, you can't fund the new loan. Escrow has to pay the loan off in full by the old lender's payoff demand. If more money comes in later, the old lender needs to send it back to you when it does.

So if someone ever tells you not to make your loan payment, ask them if what they really mean is to wait. Because if they really mean "Don't make your loan payment this month": they are risking an awful lot of potentially bad consequences to you, the borrower, if they can't actually fund your new loan. And judging by the amount of email I've had on this subject, it really does happen pretty much every day and to quite a few people per day.

Caveat Emptor

Original article here

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2 Comments

perplexed said:

Hi Dan,
I have a question. I am in the middle of a refinance of my primary mortgage with an offer from chase called--Rate Reduction Program. This is a speedy quick refi. but will save me about a full point on my interest rate with minimal paperwork.

Anyway, my question is this refi is a no-cost refi yet my overall loan amount increases--about $750. My mortgage broker said that this increase is because they are rolling in my March Principal and ESCROW payment into my new loan and I get to "skip" my March payment. So....he said if I don't want the higher cost of my new loan, to make 2 payments. So...I want to know...where did the interest payment go with that 1st option???

I feel there is something up...I just can't put my finger on it.

Thanks!

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About this Entry

This page contains a single entry by Dan Melson published on August 22, 2022 7:00 AM.

Bridge Loans was the previous entry in this blog.

Short Sale Negotiators and the Interests of Potential Buyers is the next entry in this blog.

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