What Happens If My Servicer Changes While I'm in the Middle of Applying for a Loan Modification?

Understanding your legal rights in the event that a new company takes over the day-to-day administration of your home mortgage loan.

If you’re in the middle of applying for a mortgage modification and your loan is transferred to a new servicer, you might be worried about what will happen to that application and whether you’ll have to submit another one.

Fortunately, there are federal guidelines in place that require the old servicer to forward all of your application information and documentation to the new servicer to evaluate so you won’t have to redo it.

Read on to learn more about mortgage modifications and servicers, as well as what happens to a modification application when the servicer changes, and what you should do if (despite the federal requirements) the process doesn’t go smoothly.

Understanding How Mortgage Modifications Work

A mortgage modification is a permanent change to the terms of your mortgage loan. Often, a modification involves a reduction in the interest rate to make your monthly payments more affordable. The modification may also include one or more of the following changes to the loan:

  • extending of the length (the term) of the loan (for example, from 30 years to 40 years)

  • reducing the principal balance, and/or

  • setting aside a portion of the unpaid balance as a “principal forbearance” that does not accrue interest and is due in a balloon payment when the loan term ends.

To get a modification, you must submit your application to your mortgage servicer. (For information about mortgage modifications and other options to avoid foreclosure, see Nolo's  Alternatives to Foreclosure  area.)

Understanding Mortgage Servicers and Servicing Transfers

Mortgage servicers manage loan accounts. The servicer of your loan might be the bank that you got your loan from or it may be a separate company that the bank hired to manage your account. (That company in turn might hire another party -- a subservicer -- to manage the loan.)

The servicer’s main responsibilities include processing your monthly mortgage payments, tracking your account balance, handling your escrow account (if you have one), and pursuing foreclosure if you fall too far behind in your payments. In addition, servicers also process mortgage modification applications from homeowners.

Transfers of loans among servicers are common. You’ll know if your loan has been transferred because you’ll receive notice from both the old servicer and the new one in the mail (or you might receive a combined notice). (Learn more in  What Happens If My Mortgage Servicer Changes?)

Federal Regulations Protect Homeowners With Pending Modification Applications During Transfers

In 2014, federal mortgage servicing regulations took effect that require servicers to implement policies and procedures to facilitate the transfer of information when one servicer hands a loan over to a different servicer.

Among other things, the regulations require the previous servicer to send all relevant information and documentation related to a pending modification application to the new servicer. This means you shouldn’t have to reapply or resubmit any documentation, even if your servicer changes while you’re in the middle of applying for a loan modification.

Sometimes the Process Doesn’t Go Smoothly

However, even with the federal regulations in place, there are still many homeowners who have had problems with their loan modifications as the result of servicing transfers.

For example, you could face one or more of the following common problems if your servicer changes while your modification application is pending.

  • Your modification application might get lost when the servicing rights are transferred.

  • The new servicer might ask for documentation that you already submitted to the previous servicer.

  • The new servicer might refuse to honor a modification that the previous servicer already approved.

What to Do If the New Mortgage Servicer Makes an Error

First of all, you want to make sure you don't get lost in the shuffle during a servicing transfer if you're in the middle of applying for a loan modification. After you receive notice that your loan has transferred to a new servicer, it is a good idea to call the new servicer to let it know you applied for a loan modification with the old servicer (or are in the process of applying) just to make sure that the new servicer is aware of this fact. This also gives the new servicer the opportunity to let you know if you need to take any additional steps to complete the application.

In cases where there is a problem (such as the application got lost, the new servicer refuses to honor an existing agreement, or another error was made pertaining to your modification application), you should send a written “notice of error” to the new servicer. (Learn more in  How to Dispute Errors Made by Mortgage Servicer.)

If the new servicer doesn’t correct the error, or if you are facing an upcoming foreclosure, you should speak to an attorney who can help you figure out your next steps.

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