When a mortgage company sells your loan
Lenders and investors buy and sell mortgages all the time, usually without any problems. So how do you prevent mishaps if this occurs?
- Lenders sell loans for many reasons, but your loan terms don’t change
- Your current lender must notify you of the change at least 30 days in advance
- It will tell you where to send your payments and who to contact with questions
If you get a notice from a new servicer without notification from your current servicer, don’t send any money. Contact your current servicer. That’s how you avoid fraud.
What happens when my mortgage is sold?
Some home buyers face a big surprise after closing. They learn that their mortgage was sold. This may sound alarming. But it’s actually quite common. And it won’t affect the loan rate, terms or amount owed. Still, it’s natural to ask: What happens when my mortgage is sold?
Knowing why and how this occurs can calm your fears. While some of the details are complex, the bottom line is simple. This should not affect you financially. You’ll simply need to make your monthly payment to a different company.
Learn the lingo
It’s helpful to know the difference between commonly used terms. These include “originator,” “lender,” “owner,” and “servicer.”
The originator is the person who helped you apply for the loan. This person sent your application to the lender’s underwriting department. The lender (also known as the owner) is a company that approves, funds and owns the loan. The servicer is the company that manages the loan.
“The servicer collects and processes the borrower’s payment. It will manage communications with the borrower. It will pay taxes and insurance from escrows. And it will calculate monthly payment amounts,” says attorney Elizabeth A. Whitman.
She notes that, in some cases, the servicer is the lender. Or it may hire a separate company hired to manage the loan.
Why lenders sell or transfer mortgages
Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College, says around seven of 10 mortgage loans change hands. He adds that, when a mortgage loan closes and funds, the lender has four choices:
- Keep the mortgage in its loan portfolio
- Transfer the servicing to another servicer
- Sell the loan to another company or investor
- Both transfer servicing and sell the loan
Buyers of the loan on the secondary market can include Freddie Mac, Fannie Mae and Ginnie Mae. They can also include insurance companies, mortgage REITs (real estate investment trusts), the commercial mortgage-backed securities (CMBS) market, or Wall Street brokerage firms.
“Lenders often sell their mortgages to replace the funds used to make the loan. This allows them to make additional loans to home buyers,” says Baker. “It also reduces their exposure to risk, including asset-liability mismatch.”
An asset-liability mismatch occurs when, for example, the lender owns a lot of long-term debt (30-year mortgages), but retains short-term deposits (5-year CDs, for instance). It may sell some 30-year loans and buy 5-year loans to balance itself.
Selling your mortgage allows your lender to “receive an up-front cash payment instead of waiting for you to make payments,” Whitman says. “It improves their liquidity.”
What to expect as a borrower
The good news? A transfer or sale of your mortgage loan should not affect you.
“A lender cannot change the terms, balance or interest rate of the loan from those set forth in the documents you originally signed. The payment amount should not just change, either. And it should have no impact on your credit score,” says Whitman.
If your loan gets a new servicer, “You may experience a different approach to loan servicing. But it should not increase your obligations,” she adds.
What to do if you have a new servicer
Say your loan is sold but the servicer stays the same. If so, you typically won’t be notified. You will continue to make the same payments to the same source.
“Sometimes, a mortgage loan can be sold multiple times without the borrower’s knowledge if the servicer doesn’t change with the sale,” says Whitman.
If your loan is sold or transferred and the servicer changes, here’s what to expect and do:
- Expect to receive two notices. One will come from your current servicer. The other will come from your new servicer. “Usually, a borrower’s current servicer must notify them no less than 15 days before the effective date of the transfer,” says Baker.
- Review your servicing transfer notice carefully. It must include:
- Name and address of the new servicer
- When the current servicer will stop accepting your payments
- The date the new servicer will begin accepting your payments
- The date the first mortgage payment is due to the new servicer
- Telephone numbers for the current and new mortgage servicer
- Whether you can continue any optional insurance, like credit life or disability insurance, what action you must take to maintain coverage, and whether the insurance terms will change
- A statement that the transfer will not affect any terms or conditions of your mortgage, except those directly related to the servicing of the loan. “For example, say your contract states that you were allowed to pay property taxes and insurance premiums on your own. The new servicer cannot demand that you establish an escrow account,” says Baker.
- A statement explaining your rights and what to do if you have a question or complaint about your loan’s servicing.
Prepare to send your payment to the new servicer’s address. Thankfully, there’s a 60-day grace period after the transfer, Baker adds. During this time, you can’t be charged a late fee if you mistakenly send your payment to the old servicer.
What to do if you have a new lender
If your loan is sold to a new lender:
- Expect to receive a separate notice from the new lender. This is due to you within 30 days of them taking ownership of the loan.
- Review the notice carefully. Baker says this notice must include:
- The name, address and telephone number of the loan’s new owner
- The date the new owner takes possession of the loan
- The person who receives legal notices and can resolve issues about loan payments
- Where the transfer of ownership is recorded.
“Your new lender should file paperwork with your county real estate records. This will reflect the sale of the loan,” Whitman notes.
Other do’s and don’ts
In addition, Whitman suggests these steps:
- If you have your payments automatically withdrawn from your bank account, confirm that those automatic payments will continue. And if not, ask for the necessary paperwork to sign up for that service with the new lender/servicer.
- If you send payments automatically from your bank account (instead of the lender withdrawing them), update the payment information. Pay close attention to the effective date of the loan/servicing transfer.
- If you mail payment checks, verify the new address and the new account number for the loan with the new lender/servicer.
- A week or two after the first payment to the new lender/servicer, contact them to confirm that they received your payment. There is a grace period for misdirected payments. So use that time to ensure your payments are working smoothing again.
- Never send payments to a new servicer/address until you’ve received a transfer/sale notice.
- If in doubt, confirm that the transfer/sale is legit. If you received a transfer/sale notice from a new servicer but not your current one, contact the latter. “It is not unheard of for fraudsters to tell borrowers to redirect loan payments,” says Whitman.
- Don’t fight the loan’s transfer or sale. There’s no way a borrower can prevent this from happening once a loan is active.
- If you need a future loan, you can pick a lender that retains its own loans. “Only smaller, local banks typically have this business model,” Whitman notes.
When shopping for a future loan, read the mortgage servicing disclosure statement that the lender must provide. “This discloses whether the lender intends to service the loan or transfer it to another lender,” says Baker.