My lender went out of business: What do I do?

Gina Pogol

Dear Gina, I read in the newspaper that my mortgage lender is going out of business! What should I do about my payment? I don't want to make a mistake and end up with bad credit. - Dan, Midland, Texas

Dear Dan,

This is a common problem. Many lenders, especially bad-credit mortgage lenders, are going out of business in today's economy. It sounds like you already have a mortgage with this lender, but I'm going to include tips for people who have applied for a loan with a lender that is in trouble as well.

What to do if: Your loan is in process but has not closed yet

If you are not yet in escrow and hear that your lender is in trouble, make some phone calls. Your mortgage broker should be able to tell you if your mortgage preapproval is still valid and if the kind of loan you are planning on using is still being offered. A good broker should be on top of your loan and arranging alternative financing in case your lender can't close the deal.

If you are working with a mortgage bank, check with your loan officer to make sure that you will still be able to close on time. If they won't make this guarantee, preferably in writing, you should find another lender before an unpleasant surprise tanks your home purchase.

What to do if: Your current mortgage lender is in trouble

If you already have a mortgage with a lender who might go out of business, continue making payments. Federal law does not allow mortgage terms to be changed no matter who services the loan (i.e., collects your payments), so not paying will attach bad credit history to your home loan.

Make sure, though, that your payments are being credited to your account correctly. When a new lender takes over your loan, the transition doesn't always go smoothly. First, call your current loan servicing company to see what's going on. Then, continue to make your payments to the same address until you get two notices (sometimes called transfer letters). One will be from your old lender and one will be from the new loan servicing company.

Watch out for scammers! They might deliver notices telling you to write your checks out to a new lender and send them to a new address. If this were to happen, you might find yourself funding some scumbag's retirement in the Caymans.

Verify that your taxes and insurance are actually being paid by your new lender if these amounts are included in your mortgage payment (impounded). Call your county and insurer and make sure these payments are current.

What to do if: Your lender is shut down by regulators

Be extra diligent if regulators shut down your lender for dirty dealing. Find out what the lender is accused of doing. Some fraud cases involve identity theft, which could give you bad credit and mortgage problems. Get a copy of your credit report as soon as possible and put a fraud hold on your credit report.

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