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Understanding the Assignment of Mortgages: What You Need To Know

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A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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Mortgage Assignment Laws and Definition

(This may not be the same place you live)

  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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Understanding how assignments of mortgage work.

The bank or other mortgage lender that provides a borrower with the funds to purchase a home often later transfers or assigns its interest in the mortgage to another firm. When this happens, the borrower will start sending monthly mortgage payments to the new owner of the mortgage instead of the original lender. Some other things, such as the available modes of payment, many also change.  However, the general terms of the mortgage, such as the interest rate and payment amounts, will stay the same.

If you need help with a mortgage, consider finding a financial advisor to work with .

Mortgage Assignment Basics

Mortgages are assigned using a document called an assignment of mortgage. This legally transfers the original lender’s interest in the loan to the new company. After doing this, the original lender will no longer receive the payments of principal and interest. However, by assigning the loan the mortgage company will free up capital. This allows the original lender to make more loans and generate additional origination and other fees.

At closing, borrowers sign a document granting the original lender the right to assign the mortgage elsewhere. This means the original lender doesn’t have to ask for permission to assign the mortgage but can do so whenever it wants to. Often this occurs within a few months after the closing, but it can happen at any time during the term of a mortgage. Once a loan has been assigned, it can be assigned again.

The assignment of mortgage document uses several pieces of information to accurately identify the specific mortgage that is being transferred. These generally include:

The name of the borrower

The date of the mortgage

The jurisdiction where it was recorded

The amount of money that was originally loaned

A legal description of the home or other property used as collateral to secure the loan.

Although a lender doesn’t need to request the borrower’s permission before assigning a mortgage, the lender does have to notify the borrower after the mortgage has been assigned. This notice will generally provide the new lender’s name, contact information and mailing address or other information need to make payments.

Effects of Mortgage Assignment

When a mortgage is assigned, the original terms of the mortgage remain unchanged. The monthly principal and interest, interest rate and total number of payments required to pay the loan off will be the same as on the mortgage when it was signed at closing.

A company assigned a mortgage may have different methods of accepting monthly payments, such as online payments, paper checks or money orders. A borrower who wants more payment methods may be able to get a new mortgage holder to provide them upon request.

Some things may change, however. For instance, the new owner of the mortgage may have a different method of handling escrow payments that are used to pay property taxes and the premiums for hazard insurance. The law requires mortgage companies to charge no more than one-twelfth the annual cost of property taxes and insurance each month. However, they can also require borrowers to maintain a cushion of up to one-sixth the annual total required to pay taxes and insurance. If a new mortgage company has a different policy on this cushion, it could change the total monthly payment.

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The borrower also does not need to notify the local taxing authorities or the hazard insurance provider about the assignment. The new holder of the mortgage is required to handle these notifications.

Borrowers should check the information about where payments are supposed to go. This need to be accurate so payments will be directed correctly to the holder of the mortgage and the borrower will receive credit for them.

Another important matter that may change when a loan is assigned is the procedure the mortgage company will follow in the event of default. Borrowers should make themselves familiar with the notification methods used by the new mortgage to let them know if payments are not being received and foreclosure is in the offing.

The Bottom Line

Home mortgages are often assigned by their original lenders to other companies. Assignment usually doesn’t change much for the borrower, except that the payments will go to a different address. The original loan amount, interest payment, term and monthly principal and interest part of the payment will stay the same. Assigning mortgages frees up money for the lenders to make more loans. Borrowers don’t have to be told a mortgage will be assigned, since they agree to this at closing. However, they must be notified after an assignment and told how to contact the new mortgage holder.

Mortgage Tips

A financial advisor can help you evaluate home buying and other important financial moves. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now .

Borrowers can find out whether and where their mortgage has been assigned through the Mortgage Electronic Registration Systems (MERS). This is an organization created by mortgage companies to track mortgage assignments. Borrowers can use a free online service provided by MERS to find out who owns their mortgage.

Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.

Photo credit: ©iStock.com/ArLawKa AungTun, ©iStock.com/ridvan_celik, ©iStock.com/damircudic

The post Understanding How Assignments of Mortgage Work appeared first on SmartAsset Blog .

What Is Assignment of Mortgage: What You Need to Know

We will explore the idea of mortgage assignment in this thorough guide, going over its definition, steps involved, potential consequences, and more. So read on to learn more about this important facet of the real estate market, whether you’re a homeowner, a prospective buyer, or just inquisitive about mortgages.

What is Assignment of Mortgage?

The assignment of mortgage, often simply referred to as mortgage assignment , is a legal process that involves the transfer of a mortgage loan from one party to another. This transfer typically occurs between mortgage lenders or financial institutions and is a common practice within the mortgage industry.

The Key Parties Involved

• Assignor: The person transferring the mortgage is known as the assignor. The initial lender or financial organization that gave the borrower the mortgage loan is often the assignor.
• Assignee: The assignee is the party receiving the mortgage assignment. This could be another lender or financial institution that is buying the mortgage, often as part of a financial transaction.
• Borrower: The borrower is the individual or entity that initially took out the mortgage loan to finance the purchase of a property.

Why is Assignment of Mortgage Necessary?

Assignment of mortgage occurs for various reasons, and it serves specific purposes for all parties involved.

1. Loan Portfolio Management

Mortgage assignment is a common practice used by lenders to better manage their loan portfolios. Lenders might raise funds to offer more loans or issue new mortgages by selling or transferring mortgage loans to other financial organizations. This procedure aids in keeping their portfolios risk-balanced and liquid.

2. Risk Mitigation

Lenders may also assign mortgages to mitigate risk. When they transfer a mortgage to another entity, they are essentially transferring the associated risk as well. This can be a strategic move to reduce their exposure to potential defaults or financial instability.

3. Secondary Mortgage Market

The secondary mortgage market plays a significant role in the assignment of mortgages. Many mortgages are bundled together into mortgage-backed securities (MBS) and sold to investors. Assignment of mortgages allows lenders to participate in this market, which provides additional funding for new mortgage loans.

The Assignment of Mortgage Process

The process of assigning a mortgage, or deciding to sell your mortgage , involves several steps and legal requirements. Here’s a breakdown of the typical process:

1. Agreement between Parties

The assignor (original lender) and assignee (new lender or investor) must enter into a formal agreement outlining the terms and conditions of the new mortgage assignment. This agreement includes details such as the transfer price, terms of the loan, and any specific warranties or representations.

2. Notice to the Borrower

Once the agreement is in place, the borrower is typically notified of the assignment. This notice informs them that the servicing of their mortgage, including collecting monthly mortgage payments, will now be handled by the assignee. The borrower is advised to send future payments to the assignee.

3. Recordation

In many jurisdictions, mortgage assignments must be recorded with the appropriate government office, such as the county recorder’s office. This recordation provides public notice of the transfer and ensures that the assignee has a legal claim on the property.

4. Continuation of Monthly Mortgage Payments

For the borrower, the most noticeable change is the address where monthly payments are sent. Instead of sending payment to the original lender, the borrower will send them to the assignee. It is crucial for borrowers to keep records of these changes to avoid any confusion or missed payments.

Implications of Mortgage Assignment for Borrowers

While the assignment of mortgage primarily involves lenders and investors, it can have implications for borrowers as well. Here are some important considerations for borrowers:

1. No Change in Loan Terms

Borrowers should be aware that the assignment of mortgage does not change the terms of their loan. The interest rate, monthly payments, and other loan terms remain the same. The only change is the entity to which payments are made.

2. Proper Record-Keeping

Borrowers must maintain accurate records of their mortgage payments and correspondence related to the assignment. This helps ensure that payments are correctly credited and can be vital in case of any disputes or issues.

3. Communication with the New Lender

If borrowers have questions or concerns about their mortgage after the assignment, they should reach out to the new lender or servicer. Open and clear communication can help address any issues that may arise during the transition.

4. Property Taxes and Insurance

Borrowers are still responsible for property taxes and homeowner’s insurance, even after the assignment of mortgage. These payments are typically not affected by the transfer of the loan.

The Role of Mortgage Servicers

Mortgage servicers play a crucial role in the assignment of mortgage process. This section will explore the responsibilities of mortgage servicers, their relationship with borrowers, and how they manage mortgage loans on behalf of investors or lenders.

Legal Requirements and Regulations

Assignment is subject to various legal mortgage requirements and regulations that vary by jurisdiction. Discussing these legal aspects will help readers understand the legal framework governing the assignment of mortgages in their region and how it impacts the process.

Impact on Credit and Credit Reporting

The assignment of mortgage can have implications for borrowers’ credit reports and scores. Explore how mortgage assignment can affect credit histories, reporting by credit bureaus, and what borrowers can do to protect their credit during and after the assignment.

Assignment of Mortgage vs. Assumption of Mortgage

Differentiating between assignment of mortgage and assumption of mortgage is important. This section will explain the key differences, where one party takes over the mortgage and liability, while the other party merely transfers the loan to a new lender.

Impact on Property Taxes and Insurance

Taxes and insurance are essential components of homeownership. Explain how the assignment of mortgage may affect property tax payments and the homeowner’s insurance policy, as these are often escrowed into the monthly mortgage payment.

Potential Challenges and Disputes

Discuss common challenges or disputes that can arise during or after the assignment of mortgage, such as miscommunication, incorrect payment processing, or disputes over ownership rights. Offer advice on how to handle and resolve these issues.

Foreclosure and Default Scenarios

In the unfortunate event of mortgage default, understanding how the assignment of mortgage affects foreclosure proceedings is crucial. Explain how the assignee handles foreclosures and what options are available to borrowers facing financial difficulties.

Future Trends and Innovations

Explore emerging trends and innovations in the mortgage industry related to the assignment of mortgages. This could include the use of blockchain technology, digital mortgages, or other advancements that may impact the process.

In the complex world of real estate and mortgage financing , the assignment of mortgage plays a pivotal role in the movement of funds and management of risk. It allows lenders to efficiently manage their portfolios, mitigate risk, and participate in the secondary mortgage market. For borrowers, understanding the process and implications of mortgage assignment is essential to ensure the smooth continuation of their monthly mortgage payments.

As you navigate the world of homeownership or consider entering it, remember that the assignment of mortgage is a routine occurrence designed to benefit all parties involved. By staying informed and maintaining open communication with your lender or servicer, you can ensure that your mortgage loan remains a manageable and secure financial commitment.

In summary, purchase of mortgage is a vital mechanism within the mortgage industry that facilitates the transfer of mortgage loans from one party to another. This process helps lenders manage their portfolios, mitigate risk, and participate in the secondary mortgage market.

For borrowers, it means a change in the entity collecting their monthly mortgage payments but typically does not alter the terms of the original loan. Keeping accurate records and staying informed about the transition are crucial steps to ensure a smooth experience for homeowners. So, whether you’re a homeowner, lender, or investor, understanding assignment of mortgage is key to navigating the real estate landscape effectively.

This article is for informational purposes only and does not constitute legal, tax, or accounting advice.

Written by Alan Noblitt

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What is an Assignment of Mortgage?

In real estate, an assignment of mortgage is the transfer of a mortgage, or mortgage note , to another party which typically happens on the servicing side or lender side. This is commonly seen one when lender sells or transfers your mortgage to another lender. Lenders typically have the right to to sell mortgages and assign them to new parties, but don’t typically allow borrowers to do the same. When a borrower transfers their mortgage obligation to a new party, this is called an assumed mortgage.

Assignment of Mortgage Examples

Examples where you will find assignment of mortgages include:

• Example 1. A lender selling your mortgage to another lender for servicing.

Here’s Property Shark’s definition of assignment of mortgage .

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Demystifying mortgage assignment: what it means for borrowers and lenders, demystifying mortgage assignment: what it means for borrowers and lenders. explore the process, benefits, and risks in our comprehensive guide..

A mortgage assignment is a financial process in which an existing mortgage is transferred from the current holder to another party. It can occur for various reasons, such as a lender selling the mortgage to another bank or financial institution.

Understanding mortgage assignment is essential for both borrowers and lenders, as it impacts the terms and the handling of the loan.

This brief introduction lays the groundwork for a deeper understanding of what mortgage assignment entails and its significance in the mortgage industry.

Understanding Mortgage Assignment

Mortgage assignment is when the original lender transfers the mortgage to another lender or financial institution. This can occur for various reasons, including the original lender wanting to liquidate assets or reduce risk exposure.

Steps in the Mortgage Assignment Process

Discover the critical steps in the mortgage assignment process, from initiation to completion, ensuring a smooth transfer between lenders and maintaining clarity for borrowers.

The process begins when the original lender assigns the mortgage to another party. This decision can be driven by a strategic need to manage financial resources more effectively.

The original and the new lender agree on the terms of the assignment. This agreement includes details about the transfer of rights and the responsibilities each party will hold.

Notification

The borrower is informed about the mortgage assignment. Borrowers must receive clear and concise information about what this change means for their mortgage terms.

Legal Documentation

The transfer of a mortgage is formalized through legal documents. These documents are critical as they protect the rights of all parties involved, ensuring the assignment adheres to financial regulations.

The mortgage assignment is complete once all parties have signed the legal documents and all conditions are met. The new lender now holds the rights and duties originally held by the original lender.

Critical Points for Borrowers and Lenders

Borrowers should pay attention to any changes in the terms of their mortgage, and both lenders need to handle the legal aspects carefully to prevent future disputes. Proper communication between all parties can smooth the transition and maintain trust.

Mortgage assignment doesn't have to be a complicated affair. Clear communication and adherence to legal procedures can be a straightforward process beneficial to all involved.

Advantages of Mortgage Assignment for Lenders and Borrowers

Mortgage assignment offers significant benefits for both lenders and borrowers, each finding unique advantages in the process. Understanding these benefits can help parties make informed decisions about their mortgage management strategies.

For Lenders

Mortgage assignment allows lenders to free up capital and reduce risk by transferring the mortgage to another party, optimizing their financial assets efficiently.

Freeing Up Capital

One of the primary advantages for lenders in the process of mortgage assignment is the ability to free up capital.

By transferring the rights of a mortgage to another financial institution or entity, the original lender can redeploy resources into new lending opportunities or other investments. This can improve the lender's liquidity and enhance its financial flexibility.

Reducing Risk

Mortgage assignment also allows lenders to reduce their risk exposure. When a mortgage is transferred, the associated risks, such as the possibility of default, are also transferred to the acquiring party.

This shift can help the original lender manage its risk portfolio more effectively, allowing for a more stable financial position.

For Borrowers

For borrowers, mortgage assignment can lead to better loan terms and ensure the continuity of their mortgage agreement with a new lender.

Potential for Better Terms

For borrowers, one of the critical advantages of mortgage assignment is the potential to secure better terms from a new lender. This new lender may offer lower interest rates, better repayment conditions, or more favorable terms to attract and maintain clients.

As a result, borrowers can enjoy cost savings and a loan structure more aligned with their current financial situation.

Continuity of Agreement

Despite the change in the lender, mortgage assignment ensures that the continuity of the mortgage agreement is maintained. This means that borrowers do not have to renegotiate the fundamental terms of their mortgage.

Their payment schedule, interest rate, and loan duration remain the same, providing them stability and predictability in their financial planning.

Potential Risks and Disadvantages of Mortgage Assignment

Mortgage assignment can be a valuable tool for managing financial portfolios for borrowers and lenders.

However, it comes with certain risks and disadvantages that must be considered. This section outlines some challenges, helping both parties make informed decisions.

In the mortgage assignment process, lenders face significant challenges, including legal complexities and managing borrower expectations, which require careful navigation to avoid disputes and dissatisfaction.

Legal Complexities and Potential Disputes

One of the primary concerns for lenders in the process of mortgage assignment is the array of legal complexities that can arise.

Transferring a mortgage from one lender to another involves meticulous documentation and strict adherence to legal standards, which, if not properly managed, can lead to disputes with borrowers. These disputes may revolve around misunderstandings about the mortgage terms or the new lender's responsibilities.

Challenges in Managing Borrower Expectations

Lenders may also face challenges in managing borrower expectations during a mortgage assignment. Borrowers might not fully understand the implications of their mortgage being assigned to another lender, which can lead to dissatisfaction or conflict.

Lenders must clearly and effectively communicate what a mortgage assignment means and how it will affect the borrower's loan terms and conditions.

This section examines borrowers' challenges during mortgage assignments, focusing on potential changes regarding the risks of engaging with a new lending institution.

Possible Changes in Mortgage Terms

For borrowers, one of the significant risks associated with mortgage assignment is the potential for changes in the terms of their mortgage.

When a new lender takes over a mortgage, they might adjust the interest rates, payment schedules, or other terms to align with their lending policies. Such changes can sometimes be unfavorable to borrowers, increasing their financial burden.

Risks of Dealing with a New Lending Institution

Additionally, borrowers face risks related to the reputation and stability of the new lending institution. If the new lender has less favorable customer service or a weaker financial position, it could impact the borrower's experience and mortgage security.

Borrowers must thoroughly research the new lender and ensure they are comfortable with their practices and stability.

Considering Mortgage Assignment? Fetch Your Rate Today

As we conclude our discussion on mortgage assignment, it's clear that borrowers and lenders can benefit from this process when managed effectively.

Whether you're a lender looking to reorganize your portfolio or a borrower facing a change in the lender, understanding the terms and conditions of mortgage assignment is critical.

If you're contemplating a mortgage assignment, now is the time to contact Fetch arate and see how this option might work.

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Promissory Notes, Mortgage Assignments, and MERS’ Role in Real Estate

After the fall out of the subprime mortgage crisis that triggered the Great Recession, the effects still linger when looking at homeownership statistics in the United States. Nearly 10 million homeowners lost their homes to foreclosure between 2006 and 2014. Damaged credit and traumatized psyches paired with stricter lending standards and soaring median home prices mean that some former homeowners will never own another home.

Today, the United States is seeing the highest rates of unemployment since the Great Depression at nearly 15%  due to the COVID-19 pandemic, and of those who still own a home, nearly 4.1 million borrowers are struggling to make their monthly payments. Many are turning to forbearance for momentary relief from their mortgages.

For many homeowners, the question of what happens to their mortgage after closing day might not ever come up. Until the threat of foreclosure or the need for forbearance arises, most borrowers simply send in their monthly payments with no questions asked.

Now is a good time to consider the process after closing, and how it affects their property rights. Here are some of the questions to ask.

What happens after a real estate closing?

• At closing, the borrower signs the mortgage, the deed, and the promissory note
• The mortgage and the deed are recorded in the public record
• The promissory note is held by the lender while the loan is outstanding
• Payments are sent to the mortgage servicing company
• The mortgage may be securitized and sold to investors
• The mortgage may be transferred to another bank
• The mortgage servicing rights may change to another company
• When the mortgage is paid in full, a mortgage lien release or satisfaction with a number referencing the original mortgage loan is recorded in the public record to show the debt is no longer outstanding
• The promissory note is marked as paid in full and returned to the borrower

Banks often sell and buy mortgages from each other as a way to liquidate assets and improve their credit ratings. When the original lender sells the debt to another bank or an investor, a mortgage assignment is created and recorded in the public record and the promissory note is endorsed.

What are Loan Transfer Documents?

Assignments and endorsements prove who owns the debt and subsequently who has the authority to bring foreclosure action.

Mortgage Assignments

A Mortgage Assignment is a document showing a mortgage loan has been transferred from the originator to a third party.

Note Endorsements

In addition to the assignment, the originator of the loan or the most recent holder of the loan must endorse (or sign over) the promissory note whenever the loan changes hands. Sometimes, the note is endorsed “in blank,” which means that any party that possesses the note has the legal authority to enforce it.

While these documents are supposed to be recorded in the public land records systems, sometimes there’s a “break” in the chain. A missing mortgage satisfaction or assignment can cause a huge headache for homeowners when they go to sell. Without knowing who the official mortgage lienholder of the property is, the home can’t be sold. The title agent in charge of the closing is tasked with fixing the issue so that clear ownership rights can be established and the final mortgage payoff can be sent to the right lender if needed.

What is Mortgage Securitization?

In the last 30 years or so, the buying and selling of mortgage loans between lenders, banks, and investors has grown more complicated. When a mortgage is turned into a security, it’s pooled with similar types of loans and sold on the secondary mortgage market. The purchasers or investors in these securities receive interest in principal payments.

Securitization is good for lenders because it allows them to sell mortgage loans from their books and use that money to make more loans.

Where securitization goes wrong, as we saw during the housing crisis, is when bad or “toxic” assets are pooled together and sold on the secondary market to unsuspecting investors. Subprime mortgage-backed securities had received high ratings from credit agencies and offered a higher interest rate, but they also were the first to hemorrhage losses when borrowers began defaulting on homes with underwater mortgages.

Securitization isn’t an inherently good or bad process, it’s simply a mechanism by which banks liquidize assets, increase their credit and ratings, and clear their balance sheets.

For homeowners, securitization means that the mortgage isn’t owned by a single lender and is instead part of a pool of mortgages owned by investors. A mortgage service company is responsible for collecting the mortgage payments and sending it to the proper investors. Securitization also means that tracking the note and who has the authority to enforce it can get messy.

What is the Mortgage Electronic Registration System, Inc. or MERS?

The MERS system is a private, third-party database system used to track servicing rights and ownership of mortgages in the United States. This system of registering the promissory note and mortgage was created to make transferring these documents easier on the secondary mortgage market.

How does MERS work?

For some real estate transactions, the mortgage originator will designate MERS as the mortgagee at closing. These loans are called MERS as Original Mortgagee (MOM) loans. When buying a home, a borrower should see clear language on the mortgage or deed of trust document granting and conveying legal title of the mortgage to MERS as mortgagee. This gives the company the right to act on behalf of the current and subsequent owners of the loan.

In other transactions, the loan may be assigned to MERS in the public record at a later date after closing.

After MERS is designated as a nominee to act on behalf of the lender, it tracks the transfers of the loans between parties and acts as a nominee for each holder. This eliminates the need to file separate assignments in the public record each time the loan is transferred. If a lender sells the loan, MERS will update this information in their system.

Even though MERS is designated as the mortgagee, it doesn’t own the debt or hold the promissory note. MERS doesn’t service mortgages or collect payments on mortgages.

Benefits of MERS

Some of the benefits of the MERS system include:

• No document drafting fees
• Eliminates the need for multiple assignments each time the loan changes hands
• Reduces recording costs
• Saves time and administrative costs for lenders and servicers
• Provides the identification of servicers and investors for free for homeowners and lenders
• Used by Lenders to find undisclosed liens
• Used by municipalities to find companies responsible for maintaining vacant and abandoned properties
• Mortgage Identification Numbers (MIN) are assigned to each loan for easy tracking
• Selling of loans and servicing transfers are more efficient in the secondary market
• Obtaining lien releases when a lender goes out of business is simplified
• Cost savings by the mortgage industry is theoretically passed on to homeowners

Does MERS really save consumers money?

The MERS system is not meant to act as a replacement for public land records. However, some states, including Kentucky, New York, Texas, Alabama, and Delaware have sued the company that controls MERS for lost revenue from missing record filing fees. In the case of Kentucky , the state alleged that MERS did not record mortgage assignments with Kentucky County Clerks as they were transferred between banks. At $12 a recording, all those transfers without corresponding mortgage assignments add up to big bucks.

Despite numerous lawsuits challenging MERS over its mortgage assignment authority, the company that controls MERS usually receives favorable judgments . In 2016, courts in Texas ruled that MERS’ mortgage assignments were valid and dismissed two cases. County recorders in Pennsylvania also brought cases claiming that MERS and MERS System members failed to record mortgage assignments when transferring promissory notes, a violation of Pennsylvania recording laws. MERS emerged as the winner of these lawsuits as well.

Kentucky and other states argue that skipping out on these fees hurt the consumers and taxpayers in their states.

What is MERS role in foreclosures?

Depending on the state, a foreclosure process might be either judicial (reviewed by a judge in court) or nonjudicial. In the past, MERS, acting on behalf of lenders, has been named as the plaintiff in foreclosure proceedings. Sometimes MERS was even listed as the beneficiary in nonjudicial notices.

Whether or not MERS has the authority to file foreclosure as either the plaintiff or beneficiary is hotly contested. Some states have ruled that MERS doesn’t have standing to foreclose since it doesn’t have any financial interest in either the property of the promissory note.

MERS Splits the note and the mortgage

A court case from 1872, Carpenter v. Longan , established that where the promissory note goes, a deed of trust or mortgage must follow and, according to the United State’s Uniform Commercial Code (UCC) , the promissory note must also have a clear chain of title.

Foreclosure proceedings during the Great Recession proved to be complicated by the MERS system. Within the MERS system, a note and mortgage may be transferred multiple times, so to avoid an endorsement each time, the note is “endorsed in blank.” In one foreclosure after the other, borrowers were able to demonstrate that the subsequent assignments of the promissory note had gone unendorsed.

Although the MERS systems has helped the mortgage industry, title agents, and even borrowers better manage and understand who has the servicing rights and holds the authority to foreclose, several borrowers facing foreclosure have argued that the system impermissibly “splits” the note and the mortgage between the note holder and MERS as the beneficiary of the deed of trust or mortgage.

This process of bifurcation, it’s claimed, causes the relationship between the mortgage and note to become defective and subsequently unenforceable.

Homeowners facing foreclosure, especially in the aftermath of the housing bubble burst of 2008, were successful in delaying or avoiding foreclosure by arguing that the authority to foreclose was not satisfactorily established due to breaks in the chain of assignments and endorsements.

However, Article 3 of the UCC establishes anyone who possesses the note has the legal authority to enforce it. So foreclosing parties have countered that possession of the note should be enough.

As a result, some states, like Michigan, have ruled in favor of these borrower’s arguments by requiring reunification through valid assignment before foreclosures may proceed. Others have ruled that reunification is not necessary since MERS would be authorized to foreclose for the note holder on their behalf. In 2015, The Nevada Supreme Court actually clarified previous rulings by stating that the involvement of MERS actually cures the defect. This is because the note holder could potentially or theoretically direct or compel MERS to assign the deed of trust, resulting in reunifying the instruments.

Homebuyers should always ask questions

With the advent of eClosing solutions, eNotes, eVaults, and the MERS eRegistry , the real estate, title, and mortgage industry continues to build systems that improve the homebuying experience.

Despite all the advancements, homebuying can be a confusing and overwhelming process. It’s important to ask questions of the right real estate professionals. Hiring your own attorney to represent your interests in the real estate transaction is always a good idea.

While the pros and cons of MERS is debated, homeowners today will want to keep up with recommendations from the CFPB should they fall behind on their mortgage payments and reach out to their mortgage servicer as soon as possible.

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Amanda Farrell is a digital media strategist at PropLogix. She enjoys being a part of a team that gives peace of mind for consumers while making one of the biggest purchases of their lives. She lives in Sarasota with her bunny, Buster, and enjoys painting, playing guitar and mandolin, and yoga.

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What Is an Assumable Mortgage? Major Savings If Your Loan Makes the Cut

True to its name, an assumable mortgage is a type of home loan where the buyer takes over the seller’s mortgage, rather than applying for a new loan. Assumable mortgages offer an array of advantages over traditional loans, but not all mortgages can be passed along in this manner. Here’s how to tell if an assumable mortgage is something you should consider, as a homebuyer or seller.

What to know about an assumable mortgage

Conventional loans are not eligible for assumption; they require the loan be paid in full—and a new one issued—whenever a property is sold or transferred to a new owner.

The three types of loans that are assumable include the following:

• FHA loans :  These loans are backed by the Federal Housing Administration, which grants loans to low-income borrowers who might not quality for a conventional loan. Keep in mind that the new borrower, like the old, must qualify under all FHA terms, including credit and employment standards.
• USDA loans :  These loans are offered or backed by the U.S. Department of Agriculture to low-income borrowers in rural areas. As above, the new buyer will need to meet the USDA’s credit score and income guidelines.
• VA loans :  These loans, offered to active or retired military, can even be assumed by nonveterans.

Assumable loan benefits for the buyer

Assumable mortgages can benefit buyers in numerous ways:

• A low-interest rate:  The key benefit to assuming a loan is snagging a lower interest rate than what is currently available . For instance, if the seller took out a 30-year fixed-rate loan of $200,000 at 4.2%, the monthly mortgage payment would total $978. If you were to borrow $200,000 at a slightly higher 5.2% rate, your monthly principal and interest payments would total $1,098. “Assumable loans are most logical in a rising rate environment, which this is becoming,” says  Todd Huettner , founder of Huettner Capital in Denver, CO.
• Fewer upfront costs:  Since you aren’t getting a new loan, your costs for getting a mortgage will be greatly reduced. This can be a particular benefit if you’re assuming an FHA loan, since you won’t need to pay upfront mortgage insurance costs; you’ll just be responsible for the ongoing insurance payments for the life of the loan.
• A shorter loan life:  Since the seller has already repaid the initial years of the loan, you would need only to make payments for the remaining years. So, if the original borrower was five years into a 30-year loan, the buyer assuming that would pay for the remaining 25 years.
• Long-term savings:  This combo of a lower interest rate, fewer upfront costs, and a shorter loan life add up to major savings. You can calculate these savings with an  online mortgage calculator .

Assumable loan benefits for the home seller

If you have a stellar mortgage, you can consider offering an assumable mortgage as a “pot sweetener” for potential buyers. Of course, if you’re in a seller’s market where properties are getting snapped up, there’s less incentive to make such concessions, but if you’re struggling to find a buyer, an assumable mortgage can definitely reel buyers in.

Reasons to not get an assumable mortgage

It sounds pretty enticing, doesn’t it? But before you run out to capitalize on someone else’s favorable loan, you should realize that even if the loan is eligible for assumption, that doesn’t mean it always makes sense. Here are three scenarios that make the assumable mortgage an unfavorable option:

• The assumable mortgage has a higher interest rate.  This is a no-brainer. If the assumable mortgage has a 6% interest rate but the buyer can snag a loan for less, it’s better to get your own home loan.
• The home has appreciated significantly. If the home has risen in value by a long stretch, then assume that the loan won’t cover your costs. For instance, if the sellers bought the home for $200,000 but it’s now worth $250,000, you’ll need to pay the difference out of pocket. You can finance some of those additional costs with a  second loan , but be aware that second mortgages are more difficult to qualify for and typically have a higher interest rate than a first mortgage.
• The seller needs his VA benefit.  The VA benefit stays with the loan, not the person, which can make it challenging for the veteran to get another VA loan if he needs one after he moves on. The entitlement for each veteran is $36,000, which won’t go very far spread over two properties, but Huettner says this can work if a veteran’s old and new properties are very affordable or if he is planning to make a larger down payment on his new home and doesn’t need more of the benefit than what remains.

Despite their stringent guidelines, assumable mortgages can make great sense in a variety of circumstances. So consider talking to your lender about whether they might be a good choice for you.

Here are some listings currently for sale where an assumable mortgage is an option.

1. 27A Balsam Crest Ln Unit A, Chestertown, NY for sale for $439,900

(Realtor.com)

2.  303 W Walnut St, Whitewright, TX for sale for $335,000

3.  129 Esperanza Ave, Long Beach, CA for sale for $1,050,000

Michele Lerner contributed to this article.

Cathie Ericson writes about real estate, finance, and health. She lives in Portland, OR.

Twitter Follow @CathieEricson

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• The Legally Invalid Assignment Defense to Foreclosure

People who are facing the possibility of a foreclosure on their home may want to investigate the history of their mortgage. If the assignment to the foreclosing party is not valid, this may be a viable defense to a foreclosure. In some states, you can demand that the foreclosing party produce a written assignment of the mortgage. If it does not have an assignment or failed to record it as required by state law, this may result in the dismissal of the foreclosure action. Recording rules may require that the foreclosing party record the assignment before starting the foreclosure.

Courts in other states are more lenient in their review of assignments. Since the mortgage is closely associated with the promissory note, the foreclosing party may be allowed to enforce the promissory note even if it cannot produce a valid assignment of the mortgage. You should seek legal guidance in your state to determine whether this defense may be viable.

Homeowners who believe that they may have a defense based on an invalid assignment may wish to consult with a knowledgeable foreclosure lawyer, since this defense can become complicated. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.

The Relationship Between Mortgages and Promissory Notes

The mortgage and the promissory note are the two key documents attached to a loan for buying a home. Some purchases involve a deed of trust rather than a mortgage, but they are functionally equivalent in this context. While the promissory note is your guarantee to repay the loan, the mortgage gives the lender the right to foreclose if you do not repay the loan as arranged. The mortgage also identifies the property that will serve as security for the loan. Thus, the two documents work together in establishing the lender’s rights.

The Role of Mortgage Assignments in Loan Transfers

A bank or other lender often will sell a mortgage to another party, which will collect payments and pursue the homeowner if they fail to keep up with the mortgage. To transfer the loan, the original lender will endorse the promissory note to the new owner of the mortgage. This is because collection efforts hinge on owning the promissory note. If the foreclosing party cannot produce the promissory note, the homeowner will have a defense to the foreclosure.

Meanwhile, the new owner will record the assignment of the mortgage. This includes transferring the right to foreclose, as provided by the mortgage, to the new owner. The assignment will provide the amount of the mortgage and the names of the homeowner, the original lender, and the new owner of the mortgage. It also will contain a description of the property attached to the mortgage and the date when the mortgage took effect.

An invalid assignment defense may only be a temporary solution until the new owner records an assignment in their name.

The mortgage industry uses a tool known as the Mortgage Electronic Registration System (MERS) to keep track of assignments. MERS may be a nominee for the lender, or it may receive the mortgage as an assignment. If MERS is the current assignee, it cannot pursue a foreclosure because it does not have an interest in the promissory note. MERS simply serves as an agent for the current owner of the mortgage and assists in creating a record for transfers of the mortgage. This allows banks to more easily transfer loans among them without creating a new assignment each time. You may have a defense against a foreclosure action if MERS is listed as the owner of the mortgage. However, this likely will be only a temporary solution until the new owner records an assignment in their name.

Last reviewed October 2023

Foreclosure Law Center Contents   

• Foreclosure Law Center
• Errors and Abuses by Mortgage Servicers & Your Legal Rights
• Foreclosure Trustees & Their Legal Obligations
• Strict Foreclosure Laws
• Expedited Foreclosure Laws & Procedures
• Tax Debt Leading to Foreclosure & Legal Concerns
• Homeowners' Association Liens Leading to Foreclosure & Other Legal Concerns
• Timeshare Foreclosures & the Legal Process
• Investment Property Foreclosures & Your Legal Options
• Manufactured Home Foreclosures & Relevant Legal Concerns
• The Right of Redemption Before and After a Foreclosure Sale Under the Law
• Reinstatement and Payoff to Prevent Foreclosure & Your Legal Rights
• Fannie Mae and Freddie Mac Foreclosure Prevention Strategies
• Divorce and Foreclosure Prevention — Legal & Practical Considerations
• Natural Disasters and Legal Options for Foreclosure Prevention
• Federal Mortgage Servicing Laws Protecting Homeowners
• Fighting a Foreclosure — Legal Options and Issues
• Homeowners' Legal Rights Before, During, and After Foreclosure
• How Liens and Second Mortgages May Legally Affect Foreclosure
• Foreclosure Scams — Legal Concerns & Consumer Protections
• Judicial vs. Non-Judicial Foreclosure Under the Law
• Fighting a Foreclosure in Court & Legal Strategies
• Delaying a Foreclosure
• The Statute of Limitations Defense Under Foreclosure Law
• Using the Legally Defective Affidavit or Declaration Defense to Foreclosure
• Setting Aside a Foreclosure Sale
• Challenging Fees in Foreclosure
• Mortgage Servicing Rules, the FDCPA, and Your Legal Rights
• Working With a Foreclosure Lawyer
• Alternatives to Foreclosure — Legal & Financial Considerations
• Foreclosure Laws and Procedures: 50-State Survey
• Foreclosure Law FAQs for Consumers
• Find a Foreclosure Defense Lawyer

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D2-3.4-03, Assignment of a Mortgage Loan to the Insurer or Guarantor (11/12/2014)

Assignment of a conventional mortgage loan to the mortgage insurer, assignment of a hud or va mortgage loan to the insurer or guarantor.

If the mortgage insurer exercises a right under the master policy to acquire a delinquent conventional first lien mortgage loan, the servicer must assign the mortgage loan to the mortgage insurer and take whatever action is necessary to obtain payment under the insurance policy.

If the mortgage insurer instructs the servicer to assign an insured delinquent second lien conventional mortgage loan to it rather than continuing the foreclosure process, the servicer must prepare the necessary legal documents to assign the second lien mortgage loan and file a claim under the insurance contract.

See the Investor Reporting Manual for reporting the assignment to Fannie Mae.

If the mortgage insurer or guarantor exercises its right under the policy to acquire a delinquent government mortgage loan or an assignment is the only way to liquidate a mortgage loan, the servicer must

assign the mortgage loan to the insurer or guarantor and take required follow-up actions in compliance with applicable regulations and procedures,

file a claim with the insurer or guarantor, and

report the assignment to Fannie Mae. See the Investor Reporting Manual for reporting the assignment to Fannie Mae.

Fannie Mae will hold the servicer accountable for any loss Fannie Mae incurs because it failed to assign a VA-guaranteed mortgage loan for refunding when the VA instructed it to do so.

There are no recently issued Announcements related to this topic.                      

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Servicing Guide

Download PDF Guide

(Published: May 08 2024 )

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Guide Resources

Forms, announcements, lender letters, notices, and more.

Browse the Guide

• Copyright and Preface
• A1-1-01, Application and Approval of Seller/Servicer
• A1-1-02, Representation and Warranty Requirements
• A1-1-03, Evaluating a Servicer’s Performance
• A1-2-01, Servicer’s Termination of the Lender Contract
• A1-2-02, Fannie Mae’s Termination of the Lender Contract without Cause
• A1-3-01, Requirements for Voluntary Repurchase
• A1-3-02, Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations
• A1-3-03, Repurchase Obligations Related to Bifurcated Mortgage Loans
• A1-3-04, Reporting the Repurchase
• A1-3-05, Redelivering a Mortgage Loan
• A1-3-06, Automatic Reclassification of MBS Mortgage Loans
• A1-4.1-01, Defining a Breach of Contract
• A1-4.1-02, Fannie Mae’s Remedies
• A1-4.2-01, Compensatory Fees Other Than Delays in the Liquidation Process
• A1-4.2-02, Compensatory Fees for Delays in the Liquidation Process
• A2-1-01, General Servicer Duties and Responsibilities
• A2-1-02, Servicer’s Duties and Responsibilities Related to MBS Mortgage Loans
• A2-1-03, Servicer's Duties and Responsibilities Related to Mortgage Loans with Resale Restrictions or Shared Equity Transactions
• A2-1-04, Execution of Legal Documents
• A2-1-05, Note Holder Status for Legal Proceedings Conducted in the Servicer’s Name
• A2-1-06, Use of Fannie Mae Trademarks
• A2-1-07, Subservicing
• A2-1-08, First Lien Mortgage Loan Requirements
• A2-1-09, Compliance with Requirements and Laws
• A2-2-01, Refinance and Lending Practices
• A2-3-01, Servicer Compensation
• A2-3-02, Servicing Fees for Portfolio and MBS Mortgage Loans
• A2-3-03, Yield Differential Adjustments
• A2-3-04, Late Charges as Compensation
• A2-3-05, Fees for Certain Servicing Activities
• A2-3-06, Prepayment Premiums
• A2-4-01, Quality Control Reviews
• A2-5-01, Ownership and Retention of Individual Mortgage Loan Files and Records
• A2-6-01, Custodial Documents
• A2-7-01, Concurrent Servicing Transfers
• A2-7-02, Pledge of Servicing Rights and Transfer of Interest in Servicing Income
• A2-7-03, Post-Delivery Servicing Transfers
• A2-8-01, Mortgage Electronic Registration System
• A2-9-01, General Requirements
• A2-9-02, Special Provision for Puerto Rico
• A3-1-01, Maintaining Fannie Mae Seller/Servicer Status
• A4-1-01, Staffing, Training, Procedures, and Quality Control Requirements
• A4-1-02, Establishing Custodial Bank Accounts
• A4-1-03, Addressing Borrower Inquiries and Disputes
• A4-2.1-01, Preventing Defaults and Managing Delinquencies
• A4-2.1-02, Property Inspection Vendor Management and Oversight
• A4-2.1-03, Managing Short Sales
• A4-2.1-04, Establishing Contact with the Borrower
• A4-2.1-05, Requirements for Collection and Foreclosure Prevention Strategies Unique to Second Lien Mortgage Loans
• A4-2.1-06, Adverse Action Notification Certification
• A4-2.1-07, Servicer's Duties and Responsibilities Related to Mortgage Loans with an Outstanding Non-Interest-Bearing Balance
• A4-2.2-01, Selecting and Retaining Law Firms
• A4-2.2-02, Law Firm Management and Oversight
• A4-2.2-03, Prohibition Against Servicer-Specified Vendors for Fannie Mae Referrals, Use of Vendors, and Outsourcing Companies
• A4-2.2-04, Law Firm Suspensions, Matter Transfers, and Terminations
• B-1-01, Administering an Escrow Account and Paying Expenses
• B-2-01, Property Insurance Requirements Applicable to All Property Types
• B-2-02, Property Insurance Requirements for One- to Four-Unit Properties
• B-2-03, Master Property Insurance Requirements for Project Developments
• B-2-04, Individual Property Insurance Requirements for Units in Project Developments
• B-3-01, Flood Insurance Requirements Applicable to All Property Types
• B-4-01, Additional Insurance Requirements
• B-5-01, Insured Loss Events
• B-5-02, Uninsured Loss Events
• B-6-01, Lender-Placed Insurance Requirements
• B-7-01, General Liability Insurance Requirements for Project Developments
• B-7-02, Fidelity/Crime Insurance Requirements for Project Developments
• B-8.1-01, Conventional Mortgage Insurance Servicer Responsibilities
• B-8.1-02, Paying Conventional Mortgage Insurance Premiums
• B-8.1-03, Replacing Conventional Mortgage Insurance Policies
• B-8.1-04, Termination of Conventional Mortgage Insurance
• B-8.2-01, FHA Mortgage Insurance Coverage Requirements
• B-8.2-02, Conversion of FHA Coinsured Mortgage Loans to Full Insurance
• B-8.2-03, Termination or Cancellation of FHA Mortgage Insurance and FHA Mortgage Insurance Premium
• C-1.1-01, Servicer Responsibilities for Processing Mortgage Loan Payments
• C-1.1-02, Processing Payment Shortages or Funds Received When a Mortgage Loan Modification Is Pending
• C-1.1-03, Automatically Drafting Payments from the Borrower’s Bank Account
• C-1.1-04, Accepting Biweekly Payments from Third-Party Payment Contractors
• C-1.2-01, Processing Additional Principal Payments
• C-1.2-02, Processing Short Sale Proceeds
• C-1.2-03, Processing Payments in Full
• C-1.2-04, Satisfying the Mortgage Loan and Releasing the Lien
• C-1.2-05, Charging for a Release of Lien
• C-2.1-01, Responsibilities for ARM Loan Servicing
• C-2.1-02, Notifying the Borrower Regarding Interest Rate and/or Payment Changes
• C-2.2-01, Identifying and Disclosing Adjustment Errors
• C-2.2-02, Assuming Responsibility for Conversion Notice Errors
• C-2.2-03, Determining Whether to Provide a Refund or Credit for Overcharges
• C-2.3-01, Processing ARM Conversions to Fixed Rate Mortgage Loans
• C-2.3-02, Notifying Fannie Mae of Conversions for Portfolio Mortgage Loans
• C-2.3-03, Repurchasing Converted MBS Mortgage Loans and Redelivering Them to Fannie Mae
• C-3-01, Responsibilities Related to Remitting P&I Funds to Fannie Mae
• C-3-02, Remitting Payoff Proceeds
• C-4.1-01, Notifying Credit Repositories
• C-4.2-01, Filing IRS Forms
• C-4.3-01, Servicer Responsibilities Related to Investor Reporting
• D1-1-01, Evaluating a Request for the Release, or Partial Release, of Property Securing a Mortgage Loan
• D1-1-02, Evaluating a First Lien Mortgage Loan for Charge-Off and Release of Lien
• D1-1-03, Evaluating a Second Lien Mortgage Charge-Off
• D1-2-01, Renovation Mortgage Loans
• D1-3-01, Evaluating the Impact of a Disaster Event and Assisting a Borrower
• D1-4.1-01, Determining Whether a Transfer of Ownership Is Permitted
• D1-4.1-02, Allowable Exemptions Due to the Type of Transfer
• D1-4.1-03, Allowable Exceptions Due to State Law Restrictions (“Window-Period” Mortgage Loans)
• D1-4.1-04, Transfers of Ownership by Grant Deed
• D1-4.1-05, Enforcing the Due-on-Sale (or Due-on-Transfer) Provision
• D1-4.2-01, Conventional Mortgage Loans that Do Not Include a Due-on-Sale (or Due-on-Transfer) Provision
• D1-4.2-02, Conventional Mortgage Loans That Include a Due- on-Sale (or Due-on-Transfer) Provision
• D1-4.3-01, Transfers of Ownership on FHA and VA Mortgage Loans
• D1-4.3-02, Transfers of Ownership on RD Mortgage Loans
• D1-5-01, Call Options and Cross-Default Provisions
• D1-6-01, Requesting to Waive Certain Rights under the Mortgage Loan
• D1-6-02, Handling Notices of Liens, Legal Action, Other Actions Impacting Fannie Mae’s Interest
• D1-6-03, Handling Property Forfeitures and Seizures
• D2-1-01, Determining if the Borrower’s Mortgage Payment is in Imminent Default
• D2-2-01, Achieving Quality Right Party Contact with a Borrower
• D2-2-02, Outbound Contact Attempt Requirements
• D2-2-03, Sending a Payment Reminder Notice
• D2-2-04, Sending a Borrower a Solicitation Package for a Workout Option
• D2-2-05, Receiving a Borrower Response Package
• D2-2-06, Sending a Breach or Acceleration Letter
• D2-2-07, Resolving an Appeal of a Mortgage Loan Modification Trial Period Plan Denial for a Principal Residence
• D2-2-08, Interviewing Face-to-Face with a Borrower for Certain FHA and HUD Mortgage Loans
• D2-2-09, Additional Borrower Contact Requirements for the Servicer of a Second Lien Mortgage Loan
• D2-2-10, Requirements for Performing Property Inspections
• D2-3.1-01, Determining the Appropriate Workout Option
• D2-3.1-02, Conditions of a First and Second Lien Mortgage Loan Modification for an MBS Mortgage Loan
• D2-3.1-03, Working with a Borrower that has a Group Home Mortgage Loan
• D2-3.1-04, Offering a Workout Option When Also Servicing a Subordinate Lien Mortgage Loan
• D2-3.1-05, Interacting with Mortgage Assistance Fund Program Providers
• D2-3.1-06, Notifying Fannie Mae of Lead-Based Paint Citations
• D2-3.2-01, Forbearance Plan
• D2-3.2-02, Repayment Plan
• D2-3.2-03, Government Mortgage Loan Modifications
• D2-3.2-04, Payment Deferral
• D2-3.2-05, Disaster Payment Deferral
• D2-3.2-06, Fannie Mae Flex Modification
• D2-3.3-01, Fannie Mae Short Sale
• D2-3.3-02, Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure)
• D2-3.4-01, Military Indulgence
• D2-3.4-02, Offering a Mortgage Release (Deed-in-Lieu of Foreclosure) for a Second Lien Mortgage Loan
• D2-3.4-03, Assignment of a Mortgage Loan to the Insurer or Guarantor
• D2-3.4-04, Qualifying Mortgage Assumption Workout Option
• D2-4-01, Reporting a Delinquent Mortgage Loan to Fannie Mae
• D2-4-02, Reporting a Workout Option to Fannie Mae
• D2-4-03, Reporting Certain Workout Options to Treasury
• E-1.1-01, General Requirements for Referring a Mortgage Loan to a Law Firm
• E-1.1-02, Required Referral Documents
• E-1.1-03, Required Referral Data
• E-1.2-01, Timing of the Bankruptcy Referral
• E-1.2-02, Timing of the Foreclosure Referral for Mortgage Loans Generally
• E-1.2-03, Timing of the Foreclosure Referral for Second Lien Conventional Mortgage Loans Not Secured by a Principal Residence
• E-1.2-04, Timing of the Foreclosure Referral for Government Mortgage Loans
• E-1.3-01, General Servicer Responsibilities for Non-Routine Matters
• E-1.3-02, Reporting Non-Routine Litigation to Fannie Mae
• E-1.3-03, Reporting “Legal Filings” to MERS
• E-2.1-01, General Servicing Requirements for Mortgage Loans Under Bankruptcy Protection
• E-2.1-02, Confirming Bankruptcy Information
• E-2.1-03, Suspending Debt Collection Efforts
• E-2.1-04, Expected Servicer/Attorney Interaction During Bankruptcy Proceedings
• E-2.1-05, Filing a Notice of Appearance and Sending Proper Notices
• E-2.1-06, Reviewing Bankruptcy Reorganization Plans
• E-2.1-07, Preparing and Filing a Proof of Claim
• E-2.1-08, Monitoring Borrower Payments and Critical Dates
• E-2.1-09, Identifying Workout Opportunities
• E-2.1-10, Dealing with Delays in the Bankruptcy Process
• E-2.1-11, Remitting P&I for MBS Mortgage Loans That Are Part of a Bankruptcy
• E-2.2-01, Managing Chapter 7 Bankruptcies
• E-2.2-02, Managing Chapter 11 Bankruptcies
• E-2.2-03, Managing Chapter 12 Bankruptcies
• E-2.2-04, Managing Chapter 13 Bankruptcies
• E-2.3-01, Identifying Abusive Filers
• E-2.3-02, Addressing Individuals with Fractional Interests in a Security Property
• E-2.3-03, Handling Cramdowns of the Mortgage Debt
• E-2.3-04, Bankruptcies Involving Mortgage Loans Secured by Investment Properties
• E-2.3-05, Bankruptcies Involving Multiple Fannie Mae Mortgage Loans
• E-2.3-06, Responding to Bankruptcies Identified After Foreclosure Sale
• E-2.3-07, Cross-Border Insolvency Proceedings
• E-3.1-01, General Servicing Requirements Related to Foreclosure Proceedings
• E-3.1-02, Performing Due Diligence Prior to Considering Foreclosure
• E-3.1-03, Fannie Mae Address for Instruments of Record
• E-3.1-04, Addressing a Bankruptcy Filed During Active Foreclosure
• E-3.2-01, Conducting Prereferral Review
• E-3.2-02, Initiating Foreclosure Proceedings on a First Lien Conventional Mortgage Loan
• E-3.2-03, Initiating Foreclosure Proceedings on a Second Lien Conventional Mortgage Loan
• E-3.2-04, Postponing Foreclosure Referral for Mortgage Loans Not Secured by a Principal Residence
• E-3.2-05, Expected Servicer/Attorney Interaction During Foreclosure Proceedings
• E-3.2-06, Conducting Borrower Outreach During Foreclosure
• E-3.2-07, Impact of Engagement with a Mortgage Assistance Fund Program Provider
• E-3.2-08, Processing Reinstatements During Foreclosure
• E-3.2-09, Conducting Foreclosure Proceedings
• E-3.2-10, Paying Certain Expenses During the Foreclosure Process
• E-3.2-11, Collecting Under an Assignment of Rents
• E-3.2-12, Performing Property Preservation During Foreclosure Proceedings
• E-3.2-13, Addressing Title Defects Generally
• E-3.2-14, Addressing Title Defects for Bifurcated Mortgage Loans
• E-3.2-15, Allowable Time Frames for Completing Foreclosure
• E-3.3-01, Completing Preforeclosure Sale Review
• E-3.3-02, Certifying the Status of Workout Negotiations Prior to Foreclosure Sale
• E-3.3-03, Inspecting Properties Prior to Foreclosure Sale
• E-3.3-04, Marketing the Foreclosure Sale and Using Foreclosure Auction Services
• E-3.3-05, Issuing Bidding Instructions
• E-3.3-06, Handling a Suspension or Reduction of the Redemption Period
• E-3.3-07, Pursuing a Deficiency Judgment
• E-3.4-01, Suspending Foreclosure Proceedings for Workout Negotiations
• E-3.4-02, Canceling the Foreclosure Sale for a Completed Workout
• E-3.5-01, Foreclosure of a Property Securing an MBS Mortgage Loan
• E-3.5-02, Handling Third-Party Sales
• E-3.5-03, Providing Evidence of Title
• E-4.1-01, Notifying Fannie Mae of an Acquired Property
• E-4.1-02, Eliminations and Rescissions of Foreclosure Sales
• E-4.2-01, Completing Conveyance Documents
• E-4.2-02, Handling Reconveyance to the Insurer or Guarantor
• E-4.3-01, Managing the Property Post-Foreclosure Sale
• E-4.3-02, Inspecting Properties Post-Foreclosure Sale
• E-4.3-03, The Broker's, Agent's, or Property Management Company's Responsibilities
• E-4.3-04, Handling Eviction Proceedings
• E-4.4-01, Continuing or Canceling Property Insurance Coverage
• E-4.4-02, Remitting Property Insurance Settlement Proceeds or Unearned Premium Refunds
• E-4.4-03, Canceling Flood Insurance Coverage for Acquired Properties
• E-4.4-04, Remitting Flood Insurance Settlement Proceeds or Unearned Premium Refunds
• E-4.5-01, Filing MI Claims for Conventional Mortgage Loans or for Other Mortgage Loans for which Fannie Mae Bears the Risk of Loss
• E-4.5-02, Filing MI Claims for FHA Mortgage Loans
• E-4.5-03, Filing MI Claims for FHA Coinsured Mortgage Loans
• E-4.5-04, Filing MI Claims for FHA Title I Loans
• E-4.5-05, Filing MI Claims for HUD Section 184 Mortgage Loans
• E-4.5-06, Filing MI Claims for VA Mortgage Loans
• E-4.5-07, Filing MI Claims for RD Mortgage Loans
• E-5-01, Requesting Reimbursement for Expenses
• E-5-02, Servicer Responsibilities Prior to Requesting Reimbursement of Attorney Fees and Costs
• E-5-03, Allowable Bankruptcy Fees
• E-5-04, Allowable Foreclosure Fees
• E-5-05, Reimbursing Law Firms/Reimbursement of Uncollected Fees, Costs or Advances
• E-5-06, Technology Fees and Electronic Invoicing
• E-5-07, Other Reimbursable Default-Related Legal Expenses
• F-1-01, Servicing ARM Loans
• F-1-02, Escrow, Taxes, Assessments, and Insurance
• F-1-03, Establishing and Implementing Custodial Accounts
• F-1-04, Evaluating a Request for the Release, or Partial Release, of Property Securing a Mortgage Loan
• F-1-05, Expense Reimbursement
• F-1-06, Filing an MI Claim for a Liquidated Mortgage Loan or Acquired Property
• F-1-07, Handling Property Forfeitures and Seizures
• F-1-08, Managing Foreclosure Proceedings
• F-1-09, Processing Mortgage Loan Payments and Payoffs
• F-1-10, Obtaining and Executing Legal Documents
• F-1-11, Post-Delivery Servicing Transfers
• F-1-12, Preparing to Implement a Workout Option
• F-1-13, Processing a Fannie Mae Mortgage Release (Deed-In-Lieu of Foreclosure)
• F-1-14, Processing a Fannie Mae Short Sale
• F-1-15, Processing a Government Mortgage Loan Modification
• F-1-16, Processing a Repayment Plan
• F-1-17, Processing a Transfer of Ownership
• F-1-18, Processing a Workout Incentive Fee
• F-1-19, Processing a Military Indulgence
• F-1-20, Remitting and Accounting to Fannie Mae
• F-1-21, Reporting a Delinquent Mortgage Loan via Fannie Mae’s Servicing Solutions System
• F-1-22, Reporting a Workout Option via Fannie Mae’s Servicing Solutions System
• F-1-23, Reporting to Third Parties
• F-1-24, Requesting Fannie Mae’s Approval via Fannie Mae’s Servicing Solutions System
• F-1-25, Reclassifying or Voluntary Repurchasing an MBS Mortgage Loan
• F-1-26, Servicing eMortgages
• F-1-27, Processing a Fannie Mae Flex Modification
• F-1-28, Reviewing a Transfer of Ownership for Credit and Financial Capacity
• F-2-01, Bankruptcy Referral and Completion Timelines
• F-2-02, Incentive Fees for Workout Options
• F-2-03, Compensatory Fee Calculation Examples
• F-2-04, Firm Minimum Requirements
• F-2-05, Historical Yield Differential Adjustment Provisions
• F-2-06, Mortgage Insurer Delegations for Workout Options
• F-2-07, Reporting the Principal Amount for Mortgage Loans with Principal Forbearance
• F-2-08, Servicing Fees for MBS Mortgage Loans
• F-2-09, Servicing Fees for Portfolio Mortgage Loans
• F-2-10, Fannie Mae’s Workout Hierarchy
• F-3-01, Acronyms and Glossary of Defined Terms: A
• F-3-02, Acronyms and Glossary of Defined Terms: B
• F-3-03, Acronyms and Glossary of Defined Terms: C
• F-3-04, Acronyms and Glossary of Defined Terms: D
• F-3-05, Acronyms and Glossary of Defined Terms: E
• F-3-06, Acronyms and Glossary of Defined Terms: F
• F-3-07, Acronyms and Glossary of Defined Terms: G
• F-3-08, Acronyms and Glossary of Defined Terms: H
• F-3-09, Acronyms and Glossary of Defined Terms: I
• F-3-10, Acronyms and Glossary of Defined Terms: J
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• F-3-25, Acronyms and Glossary of Defined Terms: Y
• F-3-26, Acronyms and Glossary of Defined Terms: Z
• F-4-01, References to Fannie Mae's Website
• F-4-02, List of Contacts
• F-4-03, List of Lender Contracts

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What Is a Letter of Explanation for a Mortgage?

Why do you need a letter of explanation, how to write a letter of explanation.

• Frequently Asked Questions (FAQs)

The Bottom Line

• Buying a Home

How to Write a Letter of Explanation for a Mortgage

A letter of explanation may help you get approved for a mortgage

Wichayada Suwanachun / Getty Images

When you apply for a mortgage, the lender will review information such as your credit history, employment, income, assets, investments, and outstanding debts. But your financial statements, credit report, and tax returns don’t always tell the full story about your financial situation.

A letter of explanation helps clarify any information that might give a lender pause. Learn more about when you might need a letter of explanation for a mortgage application and how to write the letter. 

Key Takeaways

• Some mortgage lenders may request a letter of explanation if there is confusion about any details in your financial documents.
• If you’re applying for a government-backed mortgage like an FHA or VA loan, a letter of explanation may be required. 
• Even if your lender doesn’t require a letter of explanation, including one may help clarify details in your mortgage application that could otherwise lead to denial. 
• You may need to include supporting documentation to give your letter of explanation more credibility.

A letter of explanation, sometimes referred to as an LOX or LOE by mortgage underwriters, is similar to a cover letter for a job application. Just as a cover letter expands on the details in your resume, a mortgage letter of explanation further explains your financial documents. For example, you might need to explain that last year’s income wasn’t typical because you took a sabbatical, or that you missed a payment due to a healthcare emergency.  

“A letter of explanation is not a standard or defaulted requirement for a mortgage application,” said Shmuel Shayowitz, president and chief lending officer at Approved Funding, a licensed mortgage bank and direct lender. However, your mortgage lender may request one if your financial information needs clarification. If you’re applying for a government-backed loan, the agency that insures the loan may also require a letter of explanation in certain situations. 

Even if it’s not required, it can’t hurt to include a letter of explanation with your mortgage application. “The default for some processors and underwriters is to assume the worst or to err on the side of caution when something is unclear or complicated,” Shayowitz said. “Being proactive with explanation letters can go a long way in helping a loan processor and mortgage underwriter understand something that might be confusing.”

In particular, the following situations merit the inclusion of a letter of explanation. 

Erratic Income or Gaps in Employment

Most lenders look for a consistent and reliable income that ensures you can keep up with your mortgage payments. If you were unemployed or did not receive income for more than a month over the last two years, you should include a letter of explanation that details the reason you weren’t working, such as:

• Childbirth or caring for another family member
• Pursuing further education
• Being laid off
• Being self-employed or working in a seasonal industry
• Going out of business or downsizing

If you were able to make regular payments on your debts and support yourself with savings during that time, be sure to mention that in the letter.

Issues on Your Credit Report

If your credit report shows red flags, like missed payments or defaults, bankruptcies , or foreclosures , it’s essential to include a letter of explanation noting what happened and why it’s not likely to reoccur. You’ll also want to include the date of the event, the name of your creditor, and the account number associated with the delinquent debt.

No Rental or Mortgage Payment History

If you have been living with a friend or family member rather than making monthly housing payments for your own place, the homeowner you live with will need to write a letter of explanation. The homeowner should explain that they haven’t charged you rent and include the dates you lived on their property before signing the letter. 

Profits or Losses From Farming

If you filed Schedule F with your tax return because you earned or lost income from a farm property, you’re required to include a letter of explanation. Include the address of the farm and clearly state that it is not located on the property you’re buying with the mortgage. 

Large Deposits or Withdrawals

If you received a large deposit to your bank account, the lender might think you accepted a gift or a loan from a family member and wonder if your income is sufficient without additional help. A large withdrawal may also indicate to the lender that you’re having financial troubles. There are other reasons for large bank transactions, however. For example, you may have received a bonus from your employer, liquidated investments at an opportune time, or withdrawn funds for a home renovation. Include a letter of explanation that shows why the atypical transaction occurred. 

Possible Occupancy Questions

Lenders underwrite vacation homes and investment properties differently from primary residences. It’s illegal to misrepresent your occupancy intentions. If you’re applying for a primary residence mortgage for a property located far from your employer, or if you’re applying for a second home mortgage for a property in close proximity to your primary residence, the lender may think you intend to use it as a rental property. 

If you think the lender may have questions about how you intend to use the property, include a letter of explanation.  

Address Discrepancies

If any of your documents show a different address, you should include a letter of explanation with a reason for the discrepancy to assure the lender you’re not a victim of identity theft.  

“Your explanation letter should be specific, precise, and well-communicated,” said Shayowitz. Avoid general statements about your ability to manage your finances and speak to a specific issue. 

For example, if you missed a payment, explain why it happened, point to your otherwise positive payment history, and state when you brought your account back up to date. A statement like “I make every effort to stay on top of my payments” is too vague because it won’t provide the lender with the details they need to make an approval decision. 

You may need to attach supporting documentation as well. For example, if you’re buying a home far away from work, you might want to include a letter from your employer that shows your remote work arrangement. If you took out a large withdrawal to pay for landscaping in order to prep your home for sale, include a receipt from the landscaping company. If you missed a payment due to being hospitalized, include medical records. 

You’ll also want to include the following elements:

• Your name, address, and phone number
• The lender’s name, address, and phone number
• The mortgage application number
• Your explanation, which should refer to the attached documents that support it
• Your signature and the date

Example of a Letter of Explanation

Today’s Date

Example Lender Lender Address

Loan Application Number

RE: Anna Smith’s Mortgage Application

To Whom It May Concern,

I am writing to explain my gap in employment that occurred between 02/15/2023 and 04/10/2023. 

My mother was admitted to the hospital for surgery on 02/09/2023 after a fall. I applied for Family and Medical Leave on 02/10/2023 in order to care for my mother during her recovery. My employer approved FMLA-protected leave on 02/14/2023. I have attached the approval letter from my employer, which grants up to 12 weeks of leave. 

During my period of unpaid leave, I relied on sufficient reserves in my savings account as well as my husband’s income to cover my expenses. I didn’t miss any payments on my credit cards or auto loan. I returned to work on 04/11/2023. In the following months, I made several deposits into my Capital One savings account to replenish my reserves. 

Anna Smith’s Address Anna Smith’s Phone Number

How Do You Start a Letter of Explanation?

At the top of the letter, include the date, the name of the lender, the lender’s address, and your loan application number. In the next line, write “Re: (Your Name)’s Mortgage Application.” Address the letter to “To Whom It May Concern,” and note which issue you are addressing in the first sentence. 

What If Your Mortgage Letter of Explanation Is Rejected?

If your letter of explanation is rejected, you have a few options. If the information you provided wasn’t sufficient, you can write a more detailed letter and include supporting documentation. You can also try applying for a mortgage from a different lender. If you’re struggling to get approved , you may need to resolve whatever problem you’re explaining in the letter before trying again. 

How Long Should a Letter of Explanation Be?

A letter of explanation only needs to be long enough to convey the details of the issue you’re explaining. For example, if you missed a payment, you should include the date of the missed payment, the reason you missed it, and how you’ve remedied or plan to remedy the issue. A few sentences may suffice, or your letter may run longer if it’s a complex situation and you need to reference supporting documents. 

Is a Letter of Explanation Necessary?

A letter of explanation is not always necessary. If there are no red flags in your financial history, you may be approved without a letter of explanation. But if there are issues that might raise concerns, you’ll want to include a letter of explanation. You’ll also need to write a letter of explanation if the lender requests one, or if it’s required by the government agency backing the mortgage. For example, for all FHA-approved mortgages , the Department of Housing and Urban Development (HUD) requires a letter of explanation from borrowers who have collection accounts or judgments.

A letter of explanation can help your mortgage application process, especially if you have had financial issues you want to clarify. A good letter will address the specific issues and explain why they are not likely to reoccur. Consider consulting a real estate professional for more guidance in writing a letter of explanation that fits your needs.

Chase. " What Documents Are Needed to Apply for a Mortgage? " 

Citizens Bank. " How to Write a Letter of Explanation ." 

National Association of Mortgage Underwriters. " Best Practices: Letters of Explanation ." 

Ally Bank. " How to Write a Letter of Explanation ." 

Newcastle Loans. " Principal Residence, Second Home, or Investment Property? " 

Griffin Funding. " Letter of Explanation ." 

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Rating Action Commentary

Fitch Assigns Stratton Mortgage Funding 2024-3 PLC Expected Ratings

Tue 28 May, 2024 - 11:37 AM ET

Related Content: Stratton Mortgage Funding 2024-3 PLC - Appendix Stratton Mortgage Funding 2024-3 PLC

Fitch Ratings - London - 28 May 2024: Fitch Ratings has assigned Stratton Mortgage Funding 2024-3 PLC's notes expected ratings, as detailed below.

The assignment of final ratings is conditional on the receipt of final documents conforming to the information already reviewed.

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Stratton Mortgage Funding 2024-3 PLC is a securitisation of non-conforming owner-occupied (OO) and buy-to-let (BTL) mortgages backed by properties located in the UK. The residential mortgages were originated by GMAC-RFC Limited, GMAC, Amber Homeloans Limited, Edeus Mortgage Creators Limited, Kensington Mortgage Company Limited and Mortgages 1-2-4-5-6-7 Limited.

These assets were previously securitised in the Stratton Mortgage Funding 2020-1 plc and Stratton Mortgage Funding 2021-3 plc transactions. The pool also includes 15 commercial loans originated by NRAM Limited, which were not previously securitised.

KEY RATING DRIVERS

Seasoned Loans: About 98.4% of loans in the pool were originated between 2003 and 2008. The pool has benefited from considerable house price indexation, with a weighted average (WA) indexed current loan-to-value of 49.5%, leading to a WA sustainable LTV of 62.0%. The OO loans, which make up 84.2% of the pool, contain a high proportion of interest-only loans (86.7%).

High Arrears and Non-Performing L oans: Total arrears were 34.1% at the end-April 2024 pool cut-off date. Also, Fitch views 7.7% of loans in the pool as non-performing as the borrowers have not made any payments in the last three months. Fitch applied its UK RMBS Rating Criteria in its analysis and applied additional recovery haircuts and yield compression. The agency assumed no interest payments were made by borrowers for 5% of the pool, which reduces the available revenue funds in the transaction.

Ratings Lower than MIR s : Fitch conducted a forward-looking analysis by running scenarios and assuming higher defaults and lower recovery rates. This was to account for the arrears trend compared with the Fitch UK RMBS non-conforming index and weaker recovery proceeds than envisaged by the agency's criteria assumptions. The assigned rating for the class B notes is one notch lower than the model-implied rating (MIR) and in line with Fitch's UK RMBS Rating Criteria report. The assigned ratings for the class C to F notes are lower than their MIRs by up to four notches, a variation from the criteria.

Weak Representations and Warranties Framework: The seller provides the majority of representations and warranties Fitch expects in a UK RMBS transaction, but many are qualified by awareness on the part of the seller. Protection for R&W breaches is limited to the seller's obligation to repurchase mortgage loans or make an indemnity payment in lieu of such repurchases.

The seller is not a rated entity and may have limited resources available to indemnify the issuer or to repurchase loans if there is a breach of the R&Ws. Fitch views this framework as weak in comparison to typical UK RMBS, but the seasoning of the assets, and the absence of warranty breaches in the Stratton Mortgage Funding 2020-1 plc and Stratton Mortgage Funding 2021-3 plc transactions, make the likelihood of the issuer suffering a material loss sufficiently remote.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade.

Material increases in the frequency of defaults and loss severity on defaulted receivables producing losses greater than Fitch's base-case expectations may result in negative rating action on the notes. Fitch's analysis revealed that a 15% increase in the WA foreclosure frequency (FF), along with a 15% decrease in the WA recovery rate (RR), would lead to downgrades of up to three notches for the class A and F notes, four notches for the class B and D notes, and five notches for the class C and E notes.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing credit enhancement and, potentially, upgrades. Fitch found a decrease in the WAFF of 15% and an increase in the WARR of 15% would lead to upgrades of two notches for the class B notes, four notches for the class C, D and E notes, and five notches for the class F notes. The class A notes are at the highest achievable rating on Fitch's scale and cannot be upgraded.

CRITERIA VARIATION

The class C notes are rated two notches below their MIRs, the class D and E notes three notches below their MIRs and the class F notes four notches below their MIR. This constitutes a variation from rating determination in the UK RMBS Rating Criteria, where we allow deviation of no more than one notch from the MIR.

The ratings for the class A, B and C notes were anchored on the modelled output after a 10% recovery haircut at 'AAAsf' and the 'AAsf' category where we deem the level of defaults sufficiently stressful.

The ratings for the class D to F notes were anchored on the modelled output after a 10% increase in defaults and a 10% recovery haircut.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

DATA ADEQUACY

Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, and concluded that there were no findings that affected the rating analysis.

Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

ESG Considerations

Stratton Mortgage Funding 2024-3 PLC has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to the high proportion of interest-only loans in legacy OO mortgages, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Stratton Mortgage Funding 2024-3 PLC has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to a large proportion of the pool containing OO loans advanced with limited affordability checks, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores .

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

APPLICABLE CRITERIA

• Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 07 Jul 2023)
• Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 28 Nov 2023)
• Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 28 Nov 2023)
• Global Structured Finance Rating Criteria (pub. 19 Jan 2024) (including rating assumption sensitivity)
• UK RMBS Rating Criteria (pub. 23 Feb 2024) (including rating assumption sensitivity)
• Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 05 Apr 2024)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Multi-Asset Cash Flow Model, v3.1.1 ( 1 )
• ResiGlobal Model: UK, v2.0.1 ( 1 )

ADDITIONAL DISCLOSURES

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

ENDORSEMENT STATUS

Personal Finance

How to pay mortgage: 7 payment methods.

Our evaluations and opinions are not influenced by our advertising relationships, but we may earn a commission from our partners’ links. This content is created independently from TIME’s editorial staff. Learn more about it.

Paying your mortgage on time each month is one of the most important aspects of homeownership. It gives you the right to occupy the home and helps you prevent any negative effects on your credit score.

Depending on your mortgage lender, there may be several different ways to pay your mortgage. Keep reading as we dig into some common methods for paying your home loan as well as ways to pay it off faster.

7 ways to make your mortgage payments

Unless you make special arrangements with your lender, you will be making mortgage payments monthly for the life of your loan. With that many payments, it’s important to make them convenient for you.

While some lenders might differ from others, these are seven of the most common ways to make your loan payments.

1. Utilize online digital tools

We live in a world where digital tools are becoming a way of life, and artificial intelligence (AI) is helping to make our daily tasks easier and more efficient. One of those necessary tasks is paying a mortgage.

‌ Rocket Mortgage , one of the nation's largest mortgage lenders, utilizes AI to help with all aspects of the mortgage process, including payments. Using their chatbot Liv, you can receive personalized information about your mortgage. Liv will inform you when your next payment is due, help you make your next payment, or even make one-time principal payments.

• Simple way to make a payment outside of normal business hours.
• It’s free to use.
• You’ll need access to a computer or smartphone to make your payment.
• Chatbots aren’t always 100% accurate.

2. Make mortgage payments conveniently through a mobile app

If your lender has a mobile app , this can be a simple way to pay your mortgage every month. For example, with the Chase mobile app, you can simply log into your account from your smartphone and schedule your next payment within minutes.

• Fast and free way to make a mortgage payment.
• You’ll also have access to statements and tax documents.
• Some lender apps will even let you send year-end tax statements to your tax preparer.
• Not ideal if you don’t have a smartphone.

3. Automate your payments by scheduling withdrawals

Having your mortgage payments automatically withdrawn from your checking or savings account each month is a hassle-free way of making sure you’re never late on a payment (though most lenders do have a grace period of a couple of weeks before you’ll be charged a late fee on your account).

To set up an automatic mortgage payment, you can take care of everything in your mortgage lender’s online dashboard or through its mobile app. Once your recurring payment is set up, the mortgage payments will be automatically withdrawn from your account on the day you choose.

If your lender doesn’t give you the option to set up recurring payments, you could use the payment app Cash App to pay your mortgage from your bank account.

You can set up your recurring payment to take place on a day when you typically receive your paycheck.

• Allows you to avoid missing a mortgage payment.
• Free to set up with most lenders.
• You must ensure you have enough money in your checking or savings account on the day your payment is withdrawn.

4. Pay your mortgage with a credit card

Some people may want to pay their mortgage with a credit card to earn credit card rewards . Unfortunately, most lenders will not allow you to use a credit card to make a loan payment.

You can, however, use a third-party processor like Plastiq to make a mortgage payment with your credit card. They will charge a small processing fee and pay your lender on your behalf.

• You can earn credit card rewards.
• If you have a financial emergency like a job layoff, using a credit card will allow you to stay current on your mortgage payments.
• Most lenders won’t accept credit card payments directly.
• There will be a service fee to pay through a third-party processor.

5. Pay in person (give your lender a check)

If your mortgage lender is local, you can stop by the branch to make your payment. Typically, they will accept a regular check, certified check, or cashier's check .

Checks are a popular way for many people to pay their mortgage because there is no limit on the amount. Unfortunately, they include your personal information, so there is the risk of fraud.

Regardless of the method you use to make an in-person payment, this is ideal for anyone who would prefer to pay their mortgage without technology.

• Free and typically posted to your account the same or next business day.
• Must travel to a branch location.

6. Mail in your mortgage payments

Sending your payments through the mail each month is how many people used to pay their mortgage. Similar to in-person payments, you can use a standard check, cashier's check, or certified check.

One downside to mailing your payment is the speed at which it will get to your bank. Because you’ll need to rely on the postal service, there could be a delay of several days from when you put the check in the mail to when your lender receives it. You’ll need to be careful that your payment doesn’t arrive after the grace period, or you’ll be charged a late fee.

Another risk is check washing, a scam that involves changing the payee name and sometimes the amount on a check and then fraudulently depositing it. One way to avoid being a victim is to mail your check at the post office or in a blue collection box just before the last pickup of the day.

• It costs just the price of a check, a stamp, and an envelope.
• There is a higher risk for fraud.
• It will also take several days for your lender to receive payment.

7. Make your payment with a money order

‌ Western Union is a great choice for paying via money order , which is a popular payment method because they don’t contain any personal information. Unfortunately, most retailers limit the size of money orders that can be purchased to between $700 and $1,000.

• Secure way to pay your mortgage.
• Money order amounts have limits.
• There is a fee to purchase a money order.

Tips to pay your mortgage

When paying your mortgage, it’s important to consider what will be most convenient for you. Convenience is going to help you pay your mortgage on time. If you struggle to remember to make on-time payments, it might be a good idea to set up your mortgage to be paid automatically on a day that works best for you.

How to pay off your mortgage faster

If your goal is to become debt-free, you might be looking to pay off your mortgage early. Below are some of the best ways to accelerate the pay-off of your mortgage.

Contribute additional principal monthly

If feasible with your budget, one of the best ways to pay off your mortgage faster is to increase the amount you pay each month. However, ensuring the extra payment amount is allocated to your principal balance is important. Not only will this help reduce your balance, but it will also save you on interest over the life of your loan.

Increase annual principal payments

If you cannot make additional principal payments each month, consider making a lump-sum principal payment at specific times of the year. Unless you need to pay down other debt, you can take your tax refund or annual bonus from your job and make a large payment to your principal balance.

Adopt a biweekly mortgage payment schedule

Most people make a single mortgage payment each month. What many people don’t know is that some lenders will allow you to switch to biweekly payments, which can speed up the amount of time it takes to pay off your mortgage.

If you can make biweekly payments, you’ll essentially make an extra payment each year. Double-check with your lender to see if they charge fees for biweekly payments. If they do, you’ll want to make sure it makes sense financially.

Explore refinancing for lower rates, shorter terms, or both

Refinancing your mortgage for a lower rate or shorter term is another way to pay off your mortgage faster. This means you’ll be replacing one loan with a new loan.

If you can refinance to a lower rate, your monthly payment will be reduced. Instead of paying the lower monthly payment, continue paying the old amount, allocating the difference as an additional principal payment.

Alternatively, you could refinance a 30-year loan into a 15- or 20-year loan instead. This might increase your monthly payment but would help shorten the time until it’s paid in full.

Consider mortgage recasting options

If you have a lump-sum amount of money you want to put toward your mortgage balance, another option would be recasting. To do this, you would make a lump-sum payment to your mortgage balance. Your lender would then re-amortize your mortgage with the lower principal balance.

With mortgage recasting, your interest rate and loan terms would stay the same. You would just reduce your monthly payment due to the decreased principal balance. Most lenders charge a service fee to recast a loan, but it’s significantly less than refinancing.

TIME Stamp: Find the method of mortgage payment that makes the best sense for you

Paying your mortgage on time is an important part of home ownership. Late payments can have a serious impact on your credit score. Most people find that setting up monthly automatic mortgage payments is the best way to avoid late payments. However, if you would prefer to pay your bill manually, many options are available. Just make sure you set a reminder for yourself to avoid a missed payment.

Frequently asked questions (FAQs)

What is the best way to pay off your mortgage.

The best way to pay off your mortgage is to set up automatic payments from your checking or savings account. This allows you to make sure your payment is paid on the same day every month, and you’ll never miss a payment or have one arrive late.

What happens if I pay an extra month on my mortgage?

If you make an extra mortgage payment each year, you can pay down your mortgage balance faster, which will help you save thousands of dollars on interest over the life of your loan.

What if I’m late making a mortgage payment?

Most lenders provide a grace period of around 15 days. As long as you pay your balance within the grace period, you won’t pay a late fee, and your lender won’t report a late payment to the credit bureaus. However, if you’re 30 days or more late, that could be reported to credit bureaus, negatively affecting your credit score.

Should you make biweekly mortgage payments?

Biweekly mortgage payments are a great way to pay off your mortgage balance faster. Check with your lender to ensure they allow this and have no prepayment fees.

Should I pay off my mortgage or invest?

Deciding whether to pay off your mortgage or to invest is a personal choice. Both have their advantages, so it will depend on your own financial goals.

The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.