Meeting Your Obligations as a Borrower

The importance of making your mortgage payment on time each month cannot be stressed enough. Buying a home is probably the biggest investment you'll ever make and you’ll want to successfully manage this obligation. Making payments late may result in late charges and will damage your credit rating. If you do not make your payments, the consequences will be even more serious. The lender may take action to foreclose, evict you, and sell your home. You can guarantee that this will never happen by always making your payments on time. If you do have a problem that could keep you from making your payments, you need to immediately discuss your situation with your lender. You may be able to work together to keep your house and get back on the right track.

At the closing or settlement, you signed both the note (the legal document which promises the lender that you will repay the loan) and the mortgage (the legal document that gives the lender a right to take back your property if you do not repay the mortgage or keep the other promises in the mortgage). Be sure that you have a clear understanding of all the responsibilities you agreed to when you signed these documents. Refer back to Chapter Five for more detailed information.

Make sure you know when your payments are due (usually the first day of the month) and where to send them. You will receive a payment book from the lender to help keep track of your payments. Some lenders send a bill each month instead. If you do not receive either one, contact your lender; don't wait until your mortgage payment is late.

Your mortgage note will specify a "grace period" for late payments. A grace period is the length of time that the lender will allow you to be late with your monthly payment without charging a penalty. If your payment is due on the first of the month, usually the 15th of the month is the latest acceptable date for the lender to RECEIVE your payment. (Mailing the check on the date due is NOT satisfactory.) Making payments late will give you a bad payment record and could hurt your chances of getting an extension of time on a payment in case of a real emergency. As we discussed earlier, if you are worried about making payments on time, an option is to have your mortgage payment automatically taken from your checking account each month. This is not always the best option because, if the funds are not available in your account, you may have to pay a penalty.

Another problem may be that you receive two benefit checks on two different days each month, usually the 1st and the 15th. If this is the case, ask the lender if the due date for your payment could be on the 17th or 18th of the month. In some cases, it might be possible for you to split your mortgage payment and pay it twice a month.

If you have extra resources in a particular month, you may consider adding additional money to your mortgage payment. Check with your lender and ask if there are any penalties for prepayments. Each month, most of your mortgage payment goes toward the interest on your loan. The amount that is greater than your regular monthly payment will go directly toward the principal you owe. This can shorten the life of your loan. For example, if you paid an extra $50 per month, you may reduce your loan term from 30 to 25 years. Ask your lender to calculate the exact reduction of your loan term that will be experienced if you put extra resources towards the principle of your loan.

If you have an adjustable-rate mortgage or ARM, the amount of your mortgage payments may change in the future. Your legal documents will spell out how often payment and interest rate changes may occur and under what circumstances. If you have questions about changes in your interest rate or payment, contact your lender right away and ask to have the terms of your ARM explained.

If you decide to sell your house, can you pay off your loan without being charged a prepayment penalty? Could the buyer assume (take over) your mortgage from the lender? Your mortgage documents should answer these questions. If you're unsure or have further questions, contact your lender.

It is not uncommon for a lender to transfer the responsibility of servicing (collecting and processing your mortgage payments) to another lender or servicer at a future date. One of the documents you signed at the closing allows the lender to transfer the servicing of your loan.

If your mortgage servicing is transferred, the terms of your mortgage will stay the same. If a transfer occurs, your lender will send you a letter stating that your loan servicing has been transferred, when the transfer begins, and where to send future payments. Never send your mortgage payment to a third party unless your lender notifies you that your mortgage servicing has been transferred. If you have any doubt, contact your lender to verify the transfer.

Your monthly mortgage payment needs to be your top financial priority. If you fall behind on your monthly mortgage payments, the lender has the legal right to foreclose on the loan. If this happens, the lender may force you to move out and then sell your home to pay off the loan. You risk losing your home, all of the money you have spent to date (including the down payment, closing costs, and all the monthly payments you have made), and your good credit rating. If the lender begins foreclosure proceedings, any related legal fees may be added to the amount you owe on your mortgage. If the value of your property is less than when you bought it, the foreclosure sale may not bring a high enough price to cover what you owe the lender. In this situation, the lender might have the right to make you pay the difference between what you owe and what the house sells for.

The best way to avoid having a financial problem is to plan ahead. If you have established an escrow account for long-term maintenance and repairs, you may avoid a hardship when unexpected repairs are needed. If you developed a budget to help pay your bills, stick to it! If you want to make an improvement or purchase an expensive item for your home, set aside whatever you can afford each month until you have saved enough to pay for the item you want.

If you begin to have trouble making your monthly mortgage payments, you have a serious problem! Missing even one payment may be very hard to make up. If you find yourself in this situation, you need to get help right away. First, get in touch with your lender (or loan servicer) immediately and explain your situation. If you delay calling in hopes that your financial situation will get better, you risk losing your home!

When you call the lender (or the servicer to whom you send your monthly payments), explain that your payments are late and explain why. Perhaps you were laid off from your job, you have been sick and are temporarily unable to work, or there has been a mix-up which has caused you to lose your benefits. Write down the name of the person you talk with. Write a follow-up letter that includes the information you verbally gave to that person on the phone or in person so that your explanation of the problem will be included in your loan file. If you can't reach your lender by phone, write a letter explaining the situation and ask the lender to contact you. Your letter to the lender should include the following information:

• your name;
• loan number;
• property address;
• your daytime and evening telephone numbers; and
• brief explanation of why you are unable to make the mortgage payment.

As long as your lender believes you sincerely want to make your monthly mortgage payments and keep your home, they will be willing to work with you. The lender is more apt to want to help if your payment history is good and if you contact them right away, rather than waiting for them to contact you.

Think about all possible resources. Discuss the situation with your planning team and others who provide assistance. Is there a relative, friend, or an agency who might be able to help? Can you reduce your other expenses, at least for a while? Can you work overtime or get a second part-time job?

If the lender thinks there is a good chance that you can bring your payments up to date, they may ask you to contact a credit counselor. The counselor may either work for the lender or for an independent credit counseling agency. A non-profit housing assistance agency may also be able to help. Credit counselors are trained to give advice about how to manage your money. They are skilled at helping homeowners who are having trouble paying their bills. They can help you develop and follow a realistic household budget and set up a repayment plan that will allow you to get back on track with your mortgage payments.

You may wish to locate a housing counseling agency on your own. To find one in your community, call 1-800-388-2227 or contact Fannie Mae HomePath Services at 1-800-7FANNIE (or 1-800-732-6443).

Depending on your situation, the lender might offer you some type of temporary or permanent assistance. Sometimes lenders agree to reduce or postpone your monthly payments for a few months. After the specified time period, you resume your regular payments and you will be required to pay an additional amount each month to make up for the missed payments. In extreme cases, the lender may even be willing to change the terms of your mortgage (for example, by lowering the interest rate, changing an adjustable-rate mortgage to a fixed rate, or increasing the number of years you have to repay the loan) in order to reduce your monthly payments. Working with a counselor and lender may help you meet your mortgage obligations and responsibilities.

Unfortunately, there are some individuals and companies that will try to take advantage of homeowners who have financial difficulties. Many homeowners have been cheated by individuals who say they can help, but actually cause the homeowner to lose everything. These "buyers" sometimes offer "distressed homeowner" programs for people who can no longer make their monthly mortgage payments. There are a number of different approaches that might look enticing, but if you decide that the only way out of your financial difficulty is to sell the house, talk with and seek advice from your lender, your credit counselor, your planning team, or a real estate attorney before signing any form or sales agreement.