What is Partial Payment?
Partial Payment refers to a payment that is less than the required monthly mortgage payment. This situation typically occurs when a borrower faces financial difficulties. While lenders usually do not accept partial payments, exceptions might be made during times when the borrower is experiencing temporary financial hardship. Normally, an accepted partial payment does not prevent the increase of the unpaid principal balance.
Examples of Partial Payment:
-
Example 1:
- Herbert has a monthly mortgage payment of $2,000 covering Principal, Interest, Taxes, and Insurance (PITI). Due to illness and consequent financial strain, he could only pay $500 per month for six consecutive months. Recognizing Herbert’s situation, the lender agreed to accept these partial payments without triggering a default status. However, the remaining unpaid amounts were added to the principal balance.
-
Example 2:
- Emily’s company downsized, and she temporarily had a reduction in her income, making her unable to pay the full amount on her mortgage. Her lender allowed her to pay a lower amount for three months until she found a new job. The unpaid amounts were then either capitalized into the loan or addressed through a repayment plan.
Frequently Asked Questions
When might a lender accept a partial payment?
A lender might accept a partial payment if the borrower has communicated their financial difficulties and if the lender believes it can help the borrower return to a state where they can fully meet their payment obligations in the future.
How does accepting a partial payment affect the loan?
Accepting a partial payment generally means that the unpaid portion is added to the principal balance, which increases the overall amount due. It can also result in additional interest accruing on the increased principal.
Can partial payments cause a default on the loan?
If not formally agreed upon, partial payments can trigger a default status because the full mortgage payment is not being made. However, if a lender agrees to accept partial payments temporarily, they typically also agree not to declare the loan in default during that period.
-
Mortgage:
A loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments divided into principal and interest.
-
Default:
Failure to fulfill a financial obligation, particularly a failure to make a scheduled mortgage payment, which can ultimately result in foreclosure.
-
Principal Balance:
The outstanding amount of a loan, excluding interest and other charges.
-
Forbearance:
A temporary postponement or reduction of mortgage payments granted by the lender instead of forcing default or foreclosure.
-
Loan Modification:
A change made to the terms of an existing loan by the lender in order to support the borrower’s ability to make payments.
Online Resources
References
Suggested Books for Further Studies
- “The Book on Managing Rental Properties” by Brandon Turner and Heather Turner
- “The Millionaire Real Estate Investor” by Gary Keller
- “Investing in Rental Properties for Beginners” by Lisa Phillips
Real Estate Basics: Partial Payment Fundamentals Quiz
### When would a lender most likely accept a partial payment?
- [x] During times of borrower’s financial difficulty
- [ ] Whenever a borrower requests it
- [ ] On all monthly mortgage payments
- [ ] As standard practice
> **Explanation:** Lenders may accept partial payments during times when borrowers face financial difficulties to help them get back on their feet without declaring a default.
### What typically happens to the unpaid portion of a partial payment?
- [ ] It is forgiven
- [x] It is added to the principal balance
- [ ] It is deducted from future payments
- [ ] It is paid by the lender
> **Explanation:** Unpaid portions of partial payments are generally added to the principal balance, increasing the total outstanding loan amount.
### Which scenario does NOT usually result in a lender accepting partial payments?
- [ ] Temporary job loss
- [ ] Serious illness
- [x] Routine payment habit
- [ ] Major unexpected expenses
> **Explanation:** Lenders generally do not accept partial payments as a routine payment habit but may consider it in cases of temporary job loss, serious illness, or major unexpected expenses.
### What clause prevents a borrower from being declared in default due to partial payments?
- [ ] Principal amortization
- [x] Formal agreement with the lender
- [ ] Interest augmentation
- [ ] Loan maturity modification
> **Explanation:** A formal agreement with the lender prevents the borrower from being declared in default due to partial payments during a mutually agreed timeframe.
### How does partial payment acceptance primarily impact the mortgage?
- [ ] Reduces the interest rate
- [ ] Waives off the unpaid interest
- [ ] Foregoes future payments
- [x] Increases the principal and possible interest
> **Explanation:** Accepting partial payments primarily increases the principal owed and therefore can accrue more interest over time.
### Can partial payment acceptance reduce the mortgage term?
- [ ] Yes, it always shortens the term
- [ ] In some cases
- [x] No, it typically extends it
- [ ] It has no impact
> **Explanation:** Partial payment acceptance usually results in an increase in the principal, which can extend the mortgage term or increase future payments to cover the accrued amounts.
### To avoid default status, what should a borrower ensure if making partial payments?
- [ ] Pay only principal
- [ ] Increase interest rate
- [ ] Delay communication with lender
- [x] Obtain lender's formal agreement
> **Explanation:** To avoid default status, a borrower should obtain a formal agreement from the lender if they plan to make partial payments due to financial hardships.
### What is a likely consequence if partial payments are made without lender agreement?
- [ ] The lender may offer more lenient terms
- [ ] The lender might reduce the loan amount
- [x] The lender may declare a default
- [ ] No consequence at all
> **Explanation:** If partial payments are made without the lender’s formal agreement, the lender may declare the borrower in default.
### Why might partial payment arrangements still be beneficial for borrowers?
- [ ] It allows them to avoid any interest payments
- [x] It helps them avoid immediate default and foreclosure
- [ ] It reduces their overall debt
- [ ] It usually eliminates the principal balance
> **Explanation:** Partial payment arrangements can help borrowers avoid immediate default and potential foreclosure, giving them time to stabilize their financial situation.
### Upon lender’s acceptance of partial payments, what should borrowers be aware of?
- [ ] They can stop all payments after agreement
- [ ] They should expect reduced interest charges
- [ ] They automatically get loan forgiveness
- [x] Their overall debt might increase due to the unpaid portion being added to the principal.
> **Explanation:** Borrowers should be aware that their overall debt may increase as unpaid portions are typically added to the principal, resulting in more interest over the life of the loan.
