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#1886630 - 01/14/14 08:47 PM Paid ahead several months...
1995Banker Offline
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We have a borrower who has paid several months of mortgage payments in advance. There is an escrow amount included in each payment.

Re: the 2 month cushion limitation...When we do the annual analysis, our system does not reimburse the overpayments. It recognizes each payment for the month in which it is due and only provides info on the current computation year (on the actual history disclosure)...even though there is more money in the account due to the paid ahead escrow payments. Is that okay? Will we have issues if we keep this money for future payments in which it was intended? Thanks!
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Escrows on Higher-Priced Mortgages
#1886731 - 01/15/14 12:39 AM Re: Paid ahead several months... 1995Banker
rlcarey Offline
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How can you pay a simple interest note ahead???
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#1887094 - 01/15/14 07:43 PM Re: Paid ahead several months... 1995Banker
1995Banker Offline
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Well Randy, I really don't know how to answer that...but apparently we did. yikes
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#1887238 - 01/15/14 09:52 PM Re: Paid ahead several months... 1995Banker
1995Banker Offline
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After checking a bit further, they were 30/360 loans and not simple interest...

Just wanted to make certain we are not in violation if we retain paid in advance escrow payments that are designated for specific payments.

Thanks,
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#1887282 - 01/15/14 11:19 PM Re: Paid ahead several months... 1995Banker
rlcarey Offline
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The interest accrual method (30/360) does not dictate how your payments may be are applied, but if your notes allow you to apply payments as due rather than when made, then I would think the same would be true for the amounts paid into an escrow account and your analysis should properly reflect that fact.
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#1887343 - 01/16/14 02:05 PM Re: Paid ahead several months... 1995Banker
1995Banker Offline
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Okay...looks like our accounting system is doing it correctly. Thanks for your input!
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#1887358 - 01/16/14 02:19 PM Re: Paid ahead several months... 1995Banker
Mike Baker Offline
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Depending on how the processing system parameters are set up, it is entirely possible to pay several months' payments in advance.
I once had a mortgage with a nationally known financial institution and mortgage originator and I paid ahead several months. The interest was based on a 30/360 calculation, and calculated on the balance after the last posted payment. As far as 1098 reporting, their system recognized the amounts of interest that were prepaid into the next year, and made the appropriate adjustment.

Regarding the escrow question, I think in this particular case a manual override may be needed. In the S&L where I started many years ago, our system actually appeared to "reward" the delinquent borrower and "penalize" the borrower paid ahead with regard to escrow analysis. The prepaid borrower was "penalized" in that the system assumed, worst case scenario, that no more payments would be made until the next due date, whereas in all probability, the borrower was going to continue to make monthly payments [at least, if not multiple monthly payments]. [On the other hand, the system assumed that the delinquent borrower was going to make all past due payments to bring the cycle end escrow balance to where it should be. The problem there was that there may be escrowed items due for payment which required funds that were not yet received from past due payments.] In any case, we just elected to handle the few prepaid instances manually, and assumed that we were in fact going to accumulate some "excess" funds over the 1 year analysis span..and accordingly we either refunded or made a payment decrease adjustment [which I think we could do in those days.] If you have a borrower who is paid ahead, they likely [hopefully]have a level of understanding such that it can be explained to them about the system approach to the escrow analysis vs the manual approach if you elect to do that...and that if they ever were to cease being paid ahead, there may be a need for a payment increase to bring the escrow account in line with where it needs to be.
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#1887431 - 01/16/14 03:52 PM Re: Paid ahead several months... Mike Baker
Kathleen O. Blanchard Offline

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Quite a few banks would treat it as a lump sum reduction and the customer is still due for the next monthly payment.
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#1887441 - 01/16/14 04:05 PM Re: Paid ahead several months... 1995Banker
Mike Baker Offline
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I suppose that I have always thought that secondary market mortgage loans were all structured the same way, that is, what I have always thought of as a "traditional mortgage," with interest calculated on the prior balance, using a 30 day month, 360 day year, and it being entirely possible to prepay ahead any number of payments. Granted, payments over the regular payment amount, if not directed by the borrower, could very well, depending on the mortgage servicer, be credited to principal, escrow, or even unapplied funds. However, in my case, as I said, it was a well known bank/mortage originator, and if I made multiple regular payments, the due date was advanced accordingly.
You might have some borrowers who want to do that if the receipt of their income could be somewhat erratic, or if they simply want the satisfaction or peace of mind of being paid ahead.
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#1887614 - 01/16/14 06:27 PM Re: Paid ahead several months... 1995Banker
rlcarey Offline
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It all depends on the note and the application of payments section within the note. If there is no mention of the application of payments in the note, then it would revert to State law. There is no "common practice" that is going to stand up in court as by not applying payments until a future date, it increases the finance and interest charges that the customer will owe. The application of payments has little to due with whether a lender will consider a loan past due or not. Some notes specifically state that even if a consumer pays extra, they are still liable for scheduled payments.

If you have questions, you should be having your legal counsel review your notes.
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#1888728 - 01/21/14 07:55 PM Re: Paid ahead several months... 1995Banker
John Burnett Offline
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And the IRS doesn't recognize pre-paid mortgage interest as a deduction.
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#1888785 - 01/21/14 09:10 PM Re: Paid ahead several months... John Burnett
Mike Baker Offline
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Originally Posted By: John Burnett
And the IRS doesn't recognize pre-paid mortgage interest as a deduction.


Good point, and one which should be understood if a borrower approaches the mortgage servicer about paying ahead. I had other reasons for wanting to be paid ahead, and I was aware that the paid ahead interest would come to a point [beginning with the February payment, since interest was collected in arrears] that the deduction would not be for the current tax year. In my case, the mortgage servicer did an excellent job in segregating amounts for 1098 reporting.

I would venture to guess that not very many borrowers attempt to pay ahead, at least by more than a month at the most, but it is important that anyone who does so have an understanding about the fine points.

Thank you for the responses to the interest "tangent" to which this thread turned.

I hope that the escrow analysis issue was resolved for the original poster.
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#1890390 - 01/24/14 10:22 PM Re: Paid ahead several months... 1995Banker
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It can be important to consult borrowers who believe they save interest by paying ahead, does it effect the due date, are they expected to pay next month, will they save interest paying several months at once, and what if they pay 3 payments at once, then wait 3 months to pay again? I've had each issue. Some would think they were saving on interest, some were going away for a few months and wanted it prepaid. In every case the bank should explain what's happening with the loan when they see this.

Back to the original escrow, I don't recall anything that says if a loan was prepaid that the escrow overage could be held. I would believe it would have to be refunded with the bank nicely advising the borrower that if these funds are not paid back with the payments, there will be a problem. Again to my comments above, what did the borrower expect to happen and what was their plan?
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