What Happens to Your Home Loan if the Lending Bank Fails

Your home loan will not simply disappear if the lending bank fails. Some borrowers may think they will be relieved of their duty to repay, but you will actually have to begin payments again once the loan is restructured. Essentially, your loan will be purchased by a new lender. That lender will take over the contract as stands, and you will have the same obligation to pay as you did prior to the failure of your mortgage bank.

Why a Loan is Purchased

A loan is considered to be an asset by a lending institution. Even though the loan may still be a net loss for the lender, meaning they have leant out more than they received back so far, in the long run, the loan should be profitable. Only if you default is your loan considered an actual loss. As such, another lender will be interested in this asset after the bank fails. 

Who Purchases a Loan

For an FDIC insured bank, the FDIC itself steps in to manage the liquidation of all assets. Similar to personal bankruptcy liquidation, a bank is liquidated to pay off any outstanding debt the bank had when it failed to continue business. In most cases, one large bank will simply purchase all of the assets of your previous bank. In the largest bank failure in US History, the failure of Washington Mutual, JPMorgan Chase purchased all the bank's assets. In some cases, such as the failure of a smaller bank, private investors may find an interest in the outstanding loans. These private investors will evaluate each individual loan according to their needs, and they will purchase those loans that best suit their aims. Most lenders want to purchase the loan to start receiving the payments. Some will try to force the loan into foreclosure to take over the asset.

What Happens in the Meantime

As long as your loan is in good standing, you will have to sit back and wait until you hear more from the new lender. You will have a grace period on your payments. These will be owed only once the new lender provides you with information on how to pay. No additional interest will be charged on payments not made during the grace period. Once a lender has fully purchased your loan, the new lender will contact you in order to establish a new location for you to make your payments. 

When You May Benefit

The new lender must take over the contract as is. That being said, there is a chance the lender will offer you the opportunity to modify your loan during the takeover. This typically means the lender would like to make the terms more favorable for them and not you, so you should be wary. However, there are circumstances when a modification could be mutually beneficial. For example, if you have only a few years left on your mortgage, you may be able to prepay without penalty when the loan is taken over, saving you money on interest in the future.