If all goes well with your mortgage, your money will always go toward paying your balance, and you’ll never accidentally underpay or overpay your mortgage balance.
But if you do happen to underpay or overpay, your mortgage lender can’t simply accept a partial payment or send you a refund check. Instead, your money goes into something called a mortgage suspense account.
How does a suspense account affect you as you pay down your mortgage? Read on to find out.
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 the 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 Do Mortgage Suspense Accounts Work?
Suspense accounts begin when a borrower makes a partial payment to their mortgage company. When you make a partial mortgage payment the lender will 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 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 and risk going into default.
Here’s an example to better illustrate how a suspense account works.
Let’s say that you owe a $1,000 mortgage payment due on the first of every month, but due to a mistake when you set up your auto payment, you’re only sending your lender $800 each month. Here’s how it might play out.
- You owe a $1,000 mortgage payment to ABC Bank due March 1.
- You pay $800 to ABC Bank on March 1, $200 short of a full payment.
- ABC bank does not apply the $800 as a partial payment. Instead, they put the $800 into a suspense account and charge a $100 late fee.
- The following month, you owe another $1,000 due April 1.
- You now owe payments of $2,000 for March and April plus the $100 late fee.
- You pay another $800 to ABC Bank on April 1, which means you now have $1,600 in your suspense account.
- ABC Bank reports the March 1 payment as a 30-day late payment to the credit bureaus on your account.
- $1,100 is used to make your March payment and cover the late fee. That leaves $500 in your suspense account, but that money won’t be credited to your April payment until you pay enough to cover the entire payment. Plus, you’ll get another late fee.
- The process continues to repeat every month as long as you only make a partial payment.
Suspense Account vs. Escrow Account
Unlike a suspense account, your escrow account is used every month to collect money used to cover expenses like your property taxes or homeowners insurance.
How Do I Clear a Suspense Account?
Whatever the reason, it’s important to take steps to clear your suspense account as quickly as possible so you can get your mortgage payments back on track and avoid late payments.
Why? In addition to getting in trouble with your lender, paying less than the monthly mortgage payment amount can eventually lead to negative credit score consequences.
Contact your lender
If you find that you’ve been underpaying your mortgage balance, contact your lender to find out exactly how much you currently owe and how much you need to pay to clear your suspense account.
Pay your balance
Once you know how much you currently owe and how much you need to clear your suspense account, try to pay the amount you owe as soon as possible. If you are having trouble making your payments, it may also be a sign that you need to discuss a loan modification with your lender.
Hit reset on your monthly payments
Once you’ve cleared your suspense account, make sure that you – and your autopay – are set to pay the correct amount each month to cover your monthly balance. Keep an eye on your monthly mortgage statements to make sure that you’re staying on top of what you currently owe.
Suspense Accounts: What Happens If You Overpay?
It’s also possible to overpay a suspense account. Maybe you’re rounding up to the nearest dollar when you pay. Or your adjustable-rate mortgage (ARM) has adjusted down, but you’re making the same payment as before.
If you are overpaying your suspense account, don’t assume that the money will automatically get transferred to your balance. Instead, talk to your lender to see if they can either apply the money in your suspense account to your next monthly payment or refund the money to you directly.
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 your credit report.
Often, it is an honest mistake that causes a borrower to pay a partial payment. Regardless, a suspense account is set up when a partial payment is received for any reason, be it an accident or financial shortage. The following are the most common causes of a mortgage suspense account:
If a borrower’s monthly escrow payment is increased, due to a change in 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 more in taxes than planned from the borrower’s escrow account, the mortgage company could increase the monthly payment.
In this example, let’s say that the borrower’s payment was increased to $975 per month. The payment is increased to recoup the extra money the mortgage company paid for real estate taxes and 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.
Changes in 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 or decrease 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.
Or if you are paying more than you need to, you may be losing money that you could hold onto or use to pay down your principal faster.
Can I Dispute Errors in Mortgage Suspense Accounts?
It’s also possible that your lender put money into your suspense account by mistake.
For example, if you made a full $1,200 payment toward your mortgage, but the lender only recorded $200, they may have put $1,000 into a suspense account that should have been applied to your current mortgage balance.
If something like this happens, contact your lender immediately and try to resolve the situation.
Don’t Live In Suspense
If your money is put into a suspense account, it isn’t serving your needs or going to pay off your mortgage. More than that, you risk getting hit with late fees and late payments being reported on your credit report.
Working with your lender to get your money out of a suspense account as quickly as possible is the best way to keep your mortgage up to date and keep your money working for you.