Buyer Was Furious Because Her First Payment WAs Due One Month Sooner Than She Thought!
We had a buyer who was very upset because her first payment came due a month sooner than she had expected. Her payment was large, and she had depleted most of her cash to close her purchase – so I can well understand why she was upset. So – what happened?
She closed her purchase in early August, so her agent told her (in good faith) that her first payment would not be due until October 1st. But – her first payment came due on September 1st because she signed “JULY” Loan Documents.
Mortgage Interest Paid In Arrears (For Previous Month)
As a quick reminder, mortgage interest is paid in arrears, meaning that when borrowers make mortgage payments, they are paying the interest that accrued over the previous month. Hence, a mortgage payment that comes due in December will cover the interest accrued in November.
Car loans, in contrast, pay interest in advance. Hence, a car payment that comes due in December will cover (forward pay) the interest that WILL accrue in December.
The Arrearage Exception
With respect to mortgages, the only time interest is NOT paid in arrears is at closing. At closing time, borrowers always pay interest forward to the end of the month in which they close.
Hence, if a borrower closes her purchase in November, she will pay interest through the end of the month of November. And she will then NOT have a mortgage payment until January (to cover the interest accrued in December) – and she will have NO mortgage payment in December (because she prepaid her November interest).
The Loan Doc Exception
The other exception to all this involves loan documents, or the month in which they were drawn (as that is what happened with our upset borrower, referenced at the top of this blog).
If loan documents are drawn in July, they are known as “July Loan Documents.” And typically, a buyer will sign those documents in July, pay interest through the end of July, and then not have her first payment due until September 1st.
But – sometimes, buyers sign the previous month’s loan documents early in the following month. In other words, sometimes buyers can sign July loan documents in early August, for example, and that is what happened with our borrower above.
She signed July loan documents in early August – and thus had no forward interest to bring to close (because July was over) and her first payment was due September 1st. Her agent, however, did not know she was signing July loan documents. Assuming she was signing August loan documents, her agent, in good faith, told our borrower that her first payment would not be due until October 1st – and hence the confusion and frustration on the part of our borrower. (NOTE: The loan documents and our emails made it clear that the 1st payment was due on September 1st, and there is a bit more to the story here, but I am leaving out the details in order to just make a point).
Anyway – it is rare for borrowers to sign the previous month’s loan docs, as lenders only allow that to happen for a few days into the following month. But – it is extremely important for agents and borrowers alike to understand all of this (1st payment dates, loan doc months, interest in arrears, and interest paid at close) to avoid both confusion and frustration. Having to make a $4,500 mortgage payment a month sooner than expected, after using up every dollar of cash for closing and moving, can be very frustrating for buyers.
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