What Happens If Your Mortgage Company Goes Out of Business?

When a mortgage company ceases its operations, it can cause immediate concern for homeowners. Your mortgage loan does not disappear, nor is your obligation to repay the loan absolved. The loan itself represents a valuable asset that will be transferred to another financial institution. This transition ensures that the terms and conditions of your mortgage agreement generally remain unchanged.

Understanding Your Mortgage

Many homeowners may not realize the distinction between their mortgage lender and their mortgage servicer. The mortgage lender is the financial institution that originally provided the funds for your home loan, setting the initial terms like interest rates and repayment schedules. In contrast, the mortgage servicer is the company responsible for the day-to-day management of your loan once it has been originated. This includes collecting payments, maintaining loan balances, and handling customer service inquiries.

When a mortgage company “goes out of business,” it is typically the servicer, rather than the original lender, that has ceased operations. Your loan is an asset that can be bought, sold, or transferred between entities in the financial industry. Therefore, your obligation to repay the loan continues, as the debt is simply owed to a new entity.

Managing Payments and Communications

Once your mortgage servicer changes, federal law mandates specific notification processes. You should receive a “goodbye letter” from your old servicer and a “welcome letter” from your new servicer. These letters must contain crucial information, including the name, address, and contact information of the new servicer, the effective date of the transfer, and where to send your payments.

Review these notifications carefully and verify the new servicer’s legitimacy to avoid scams. If you do not receive these notices within the expected timeframe, or if any information seems suspicious, directly contact your previous servicer to confirm the transfer. Federal regulations provide a 60-day grace period following the effective date of the transfer. If you mistakenly send your payment to the old servicer during this time, the new servicer cannot treat it as late or charge late fees.

You will need to update your payment method with the new servicer, especially if you had automatic payments set up. Establish direct payment arrangements promptly. Your loan terms, including your interest rate and monthly payment amount, will remain the same. Maintain a record of all correspondence and payments.

Escrow Account Management

For many homeowners, mortgage payments include funds allocated to an escrow account, which covers property taxes, homeowners insurance premiums, and sometimes other costs. When your mortgage company’s servicing rights are transferred, the funds held in your escrow account are typically protected. These funds are usually held in separate trust accounts and are legally required to be transferred along with your loan to the new servicer.

The Real Estate Settlement Procedures Act (RESPA) provides guidelines for the management of escrow accounts, ensuring that servicers properly handle these funds. The new servicer will assume responsibility for managing your escrow account, including making timely disbursements for your property taxes and insurance as they come due. You should receive an annual escrow statement from the new servicer detailing the activity in your account.

Monitor your escrow balance and confirm that tax and insurance payments are being made correctly by the new servicer. If you have any concerns or discrepancies, promptly contact the new servicer to clarify and resolve the issue.

Pending Mortgage Applications

If you were applying for a new mortgage or refinancing an existing one when the company went out of business, the outcome depends on the stage of your application. If your application was in its very early stages, you will likely need to restart the process with a different lender.

If your application was nearing closing, particularly if funds had already been transferred to an escrow agent, those funds should remain secure. However, the defunct lender will likely cease to underwrite new loans, requiring you to find a new financial institution to complete the process. Gather all documentation you submitted to the now-defunct company, as this will facilitate a new application. Contact any third parties involved, such as real estate agents or title companies, to inform them of the situation and coordinate next steps.