Most borrowers assume that when they create a mortgage with a lender, only the house used as collateral can be taken away if mortgage payments are missed. In many cases, this is true, and lenders can rely only on a foreclosure and later judgment liens to collect on debt. However, in some cases lenders have what is known as a right to offset, the ability to take money from a borrower automatically for the credit they loaned.
A mortgage is based on a contract between the borrower and lender. The lender, or creditor, agrees to loan money for purchasing property, but requires that that property also be used as collateral for the mortgage. This means that the lender has the ability to foreclosure on the property if mortgage payments are not made. However, in some situations a borrower creates a mortgage with the same bank that the borrower uses for other purposes, such as keeping checking and savings accounts. This can lead to a credit offset by the lender.
Right of Offset
Banks often have the right of offset when it comes to multiple accounts used by the borrower. This means that if the borrower stops making monthly payments on the mortgage, the bank has the right to offset this lack of credit payment by collecting cash straight from a borrower's account. This is legal and is an efficient method of collection on the part of the bank, since the lender does not have to wait for the mortgage to fully default and file for foreclosure. Of course, it only works if there is enough money in the accounts to cover the missing payment.
The right of offset is mentioned in mortgage contracts. If there is no right of offset given in the contract, the bank may not be able to seize assets in such a way. The right of offset is common, but borrowers can examine their specific contracts to find how it works for their particular bank. The right only exists if accounts are present with the same bank that the borrower is using for the mortgage.
A credit offset should not be confused with a garnishment. They both seize money from a bank account, but in an offset the bank is exercising a right to money that it is due and has access to. In a garnishment, a court has ordered the forced payment of a debt and takes money from an account -- nearly any account -- in order to pay, regardless of the position of the lender.
- Help With My Bank: Answers about the Right of Offset
- Bills: Right of Offset
- Freddie Mac. "Our COVID-19 Response." Accessed Sept. 8, 2020.
- Fannie Mae. "Fannie Mae Assistance Options for Homeowners Impacted by COVID-19." Accessed Sept. 8, 2020.
- U.S. Department of Housing and Urban Development. "Foreclosure Avoidance Counseling." Accessed Sept. 8, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.