What's the Difference Between Reinstatement and Payoff in Foreclosure?

You can stop a foreclosure by reinstating or paying off the loan; however, homeowners are sometimes confused about the difference between these two options. Read on to learn about the differences between a reinstatement and a payoff.

Reinstatement to Avoid Foreclosure

A reinstatement occurs when the borrower brings the delinquent loan current in one payment. Reinstating a loan stops a foreclosure because the borrower is allowed to catch up on payments in default, as well as fees and expenses incurred as a result of the default. Once the loan is reinstated, the borrower resumes making regular payments on the debt.

Contents of a reinstatement quote/letter. To reinstate a loan, you must first find out the amount needed to reinstate. You do this by requesting a reinstatement quote or reinstatement letter from the servicer. The reinstatement quote will show the exact amount needed to cure the default, as well as a good-through date for the amount. The quote will ordinarily include:

• all of the back and current payments now due
• any applicable late fees
• the cost of any property inspections
• the attorney/trustee fees and costs for the foreclosure procedure
• other expenses incurred to preserve and protect the lender's interest in the property, and
• often a recording fee for the notice of cancellation of the sale.

Time frame for reinstating a loan. Some states have a law allowing a delinquent borrower to reinstate the loan by a certain deadline, like 5:00 p.m. on the last business day before the sale date or some other deadline.

Even if state law doesn't specifically provide a right to reinstate, many mortgages and deeds of trust contain written language giving borrowers a certain amount of time in which they can get current on the loan. Check your loan documents, generally for a paragraph called "Borrower's Right to Reinstate After Acceleration" or something similar. And even if the mortgage contract doesn't mention anything about a reinstatement, the lender might, after considering the situation, let you reinstate.

To get specific information about whether your documents provide a right to reinstate in your particular situation or to get details about state-specific reinstatement laws, if there are any, consider talking to a local foreclosure attorney.

Generally, it's a good idea to reinstate as soon as possible. It's risky to wait until the last minute to reinstate. If your funds are not delivered on time, the foreclosure sale will proceed. This means if there is a delay in courier service or a bank processing error, you could lose your home. If possible, present the funds in person to the proper contact (which will be designated in the reinstatement quote) or wire the money well before the deadline. Or, if you mail in your reinstatement funds, send the check via an overnight courier so that it can be tracked.

Payoff to Avoid Foreclosure

A payoff occurs when the borrower pays the total amount required to completely satisfy the loan balance. This also stops a foreclosure because the loan is paid in full. (Paying off the loan in full before the sale is called "redeeming" the home.)

Contents of a payoff quote/letter. To pay off a loan, you must find out the exact amount needed to satisfy the debt. You do this by requesting a payoff quote from your servicer, which is also sometimes called a payoff letter or payoff statement. The payoff letter will include exactly how much you must pay by a specified date to satisfy the debt. The quote will include the unpaid principal balance and interest, plus any fees and costs. (These are similar to those listed above for a reinstatement). The payoff letter will also include wiring instructions, as well as instructions for how to pay by check. The payoff quote may also describe how much you should adjust the payment if you decide to pay a few days before or after the given payoff date.

The balance shown on your monthly billing statement is not a payoff amount. When you get your monthly mortgage payment statement, it contains your mortgage balance. This is not the amount needed to fully pay off the loan because it does not include interest, late charges, foreclosure fees and costs, and the like. A mortgage payoff quote shows how much you actually owe the lender, as opposed to the payment statement, which shows just the principal balance.

Time frame for paying off a loan. If you plan on paying off the loan, you will usually need to request a payoff quote a minimum of five business days before the anticipated payoff date. If you don't deliver the funds before the sale, the foreclosure will proceed. Again, this means if there is a bank processing error or other delay and the funds don't arrive, you could lose your home. So, make sure that you transmit the payoff funds with plenty of time for the transaction to be completed.

Time frame for the payoff statement if you request one. Under federal laws that went into effect on January 10, 2014, the servicer is required to send you a payoff statement within seven business days of your request, unless:

• The loan is in bankruptcy or foreclosure.
• The loan is a reverse mortgage.
• There was a natural disaster or other similar circumstances.
• The creditor or servicer specified reasonable requirements for making the payoff request—such as requiring you to send the request to a specific mailing address, email address, or fax number—and you didn’t follow these requirements.

If any of these exceptions apply, then the servicer must provide the payoff statement to you within a reasonable amount of time.

Requesting Your Reinstatement or Payoff Quote

To find out what it costs to reinstate or pay off your loan, call your loan servicer. The servicer might direct you to the foreclosing party's attorney or the trustee’s office to obtain the quote. Be sure to send your request in writing and save proof of the request. If the company fails to provide the quote, this can be very important in fighting the foreclosure.

If the person requesting a reinstatement or payoff quote is not a borrower, he or she will need to provide written authorization from the borrower before the servicer will provide the reinstatement or payoff quote. Payoff and reinstatement figures are not public information, and are only available to a party with a recognized legal interest in the property.

Reinstatement and payoff figures are not quoted verbally. They will only be given in a written statement.

Be Sure to Pay in Full

When reinstating or paying off a loan, you must pay every penny that is included in the quote. If you tender payment and it is not adequate to reinstate or pay off the loan, your payment might be rejected and the foreclosing party could proceed with the foreclosure sale. Often, the foreclosing party’s attorney or the trustee will require that you contact them the day before sending in reinstatement or payoff funds to verify the amount.

What if I Disagree with the Reinstatement/Payoff Quote?

If you believe the total amount due shown on the reinstatement or payoff quote is incorrect, contact the servicer, law firm and/or trustee verbally and in writing to dispute the amount. Under federal mortgage servicing regulations, you can send your servicer what's called a “notice of error.”

The notice of error (basically, a letter) should include:

• your name and information that allows the servicer to identify your mortgage loan account, and
• a description of the error (like failing to provide an accurate payoff amount). (Learn more about how to dispute servicer errors.)

For a notice of error concerning an inaccurate payoff balance amount, the servicer must correct the error, if there is one, within seven days, excluding legal public holidays, Saturdays, and Sundays. For most other kinds of errors, the servicer must correct the problem within 30 days, excluding legal public holidays, Saturdays, and Sundays. (Though, the servicer may generally extend the 30-day period by 15 days if it informs you about the extension and tells you why there is a delay. The 15-day extension isn't permitted if your notice of error is about a payoff statement.) If the servicer does not respond to your notice of error, consult with an attorney.

Keep in mind that the foreclosure probably won't stop just because you have a dispute with the quote. You might want to pay the full amount, especially if it is a dispute over a small amount of money, just to ensure that the foreclosure process is halted.