For many of our clients and too many in the mortgage, real estate and title businesses, mortgage payoffs create confusion and misunderstanding. The biggest complaint comes from those borrowers refinancing their mortgage. The question they ask is if my balance was this amount, why is the not the same on my HUD-1 Settlement Statement?
The answer is accrued interest and the expected date of the lender’s receipt of funds. More on this in a moment…
In a recent article Jack Guttentag, the mortgage professor, commented on how mortgage payoffs work in a refinance. It needs to be pointed out that mortgage payoff calculations work the same in the sale of a property and payoff of the existing mortgage as they do in a refinance (except for the three day right of rescission for a refi).
What bothered me most about this particular article was Guttentag’s insinuation that because of a incoherent explanation and lack of understanding that somehow the loan officer was “trying to pad his profit”. Guttentag should know that there is no padding of profit possible under the new compensation rules. Furthermore, bad explanations aren’t necessarily a precursor of undeserving profits.
Just because this is a difficult subject and the source of misunderstanding doesn’t mean there is something unsavory going on. Guttentag himself says that he has never before written about this subject. Maybe he found it to be too difficult.
Here was the loan officer’s response:
“Basically, the way mortgage companies do mortgage payoffs is we take your payoff amount off your credit report plus one month of payment. The reason we do that is because when you make your upcoming October payment, you are paying principle for October, but you’re paying September’s interest. So when you close this loan — say, in November — you still have to account for that monthly interest payment you missed.
“So that’s why we roll in the whole loan amount, then at closing we net out the principle and escrow portion of it and just make it the interest only. That’s why your payoff is showing up higher than the $219,000. But the way that is combated is you will skip one month of payments all together. So (if) you close in November, you will skip December altogether, then start in January.”
It’s a poorly worded explanation of a somewhat complex moving target.
Loan Balance RARELY = Mortgage Payoffs Balance
But, there is one more important aspect to this that Guttentag failed to point out and that refinance borrowers should understand. There are at least two times that a loan payoff should be calculated: once at loan application before submission to underwriting and then again by the lender servicing the loan as requested by the title company. In his article, Guttentag has inadvertently or intentionally mixed the two together.
Anytime a loan office takes a loan application there are certain assumptions that must be made in the process. One of these is the closing and funding date of the new loan. This loan officer was performing a pro forma analysis of the details of the transaction that included accrued interest through the expected funding date on the loan principle being paid off.
That’s a mouthful – are you still with me?
If he had not included the accrued interest which in some cases can be as many as 45 days of per diem interest, the new loan amount may have been insufficient to cover the net charges to the borrower requiring the borrower to bring cash to the table. Accrued interest, real estate tax payments and escrows are often the source of unexpected charges, not some trumped up profit padding. The loan officer was not lazy using the loan balance on the credit report and instead calculated the expected payoff balance which includes principle balance and expected accrued interest and any other charges including a release recording fee. In doing this, the loan officer was actually being diligent in their duties.