Unless you work in the mortgage industry or the credit industry, you probably have no idea how to answer the question, “what is a mortgage suspense account?” If you do know how to answer the question, then you probably have a pretty unpleasant story to tell regarding how you personally learned the answer.
What Is a Mortgage Suspense Account?
Lenders use mortgage suspense accounts to store money when borrowers either overpay or underpay their mortgage payments. So, if you only make a partial mortgage payment, that money goes into a suspense account until you pay the bank enough to cover your last payment (or next payment, if you made a partial payment before the due date) in full.
Likewise, if you pay more than the necessary amount, the extra money will be funneled into a suspense account where it’ll stay until it’s put toward another payment.
How Does a Suspense Account Start?
Suspense accounts begin when a borrower makes a partial payment to their mortgage company. When you make a partial mortgage payment the lender will actually hold the funds in a suspense account and none of the funds will be applied to your loan balance.
The following month, if the borrower makes another partial payment, then the new funds are added to the suspense account as well. If there are enough funds to pay the full payment from the previous month, those funds will be removed from the suspense account and applied to the mortgage.
Any leftover over balance remains in the suspense account and the loan is still considered 30 days behind. If the borrower continues to make partial payments each month then this process is repeated over and over again. Eventually, it will lead to late payments showing up on your credit report – possibly every single month – because you’ll be 30 days late in perpetuity.
Here’s an example, a more visual example, to better illustrate how a suspense account actually works:
- John Doe owes a $1,000 mortgage payment to ABC Bank on March 1st.
- John pays $800 to ABC Bank, $200 short of a full payment.
- ABC bank does not apply the partial payment, but rather puts the $800 into a suspense account.
- The following month, John Doe owes another $800 for April plus March’s payment plus a late fee.
- ABC Bank reports a 30-day late payment to the credit bureaus on John’s account.
- John pays $800 to ABC Bank, which means he now has $1,600 in his suspense account, ~$1,000 is used to make his March payment.
- The process continues to repeat every month as long as John makes a partial payment.
What Are Common Causes of Suspense Accounts?
To put it simply, a suspense account is typically set up by a mortgage company when a borrower sends in a partial payment instead of the full amount owed. Partial payments will eventually lead to rolling 30 day late payments on the borrower’s credit report.
Often, it is an honest mistake which causes a borrower to pay a partial payment. Regardless, a suspense account is set up when a partial payment is received for any reason – accident, stubbornness, financial shortage, etc. The following are the most common causes of a mortgage suspense account.
1. Escrow shortage
If a borrower’s monthly escrow payment is increased, due to higher than anticipated taxes or insurance premiums, then the total monthly payment the borrower owes to the mortgage company is increased as well.
For example, if a borrower formerly paid $850 per month, but the mortgage company had to pay higher than planned for taxes from the borrower’s escrow account; the mortgage company could increase the monthly payment.
Let’s say that the borrower’s payment was increased to $975 per month for this example. The payment is increased in order to recoup the extra money the mortgage company paid for real estate taxes and in order to collect enough money for taxes the following year.
However, if the borrower continued to pay only $850 instead of the new monthly payment of $975 then a suspense account would be set up and rolling late payments would follow shortly thereafter.
2. Increased interest rate
If your mortgage does not have a fixed rate, which means that the interest rate you pay is subject to change, then your monthly payment could potentially increase in the future.
Just like the example above with the escrow account, if the mortgage company increases your monthly payment due to a higher interest rate then you will have to pay the new payment amount or suffer very negative credit score consequences and late fees.