A loan service transfer can seem like a scary process, one that invokes a lot of questions. Questions like, where do I send my payment? Will the terms of my mortgage loan change? Will I owe the new company more than I did the last one?
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If you don’t understand the loan service transfer process, these are natural concerns. But once you learn what it’s all about – and especially after you experience it the first time – you learn to relax through the process.
What is Mortgage Loan Servicing?
There are two major lending functions to the mortgage process. The first is originations, which is the front-end of the process. That’s everything that’s involved prior to and including the loan closing. The lender pre-qualifies you for the loan, takes an application, gathers documentation, underwrites and approves the loan, and takes the loan to the closing table. After the closing, originations will also handle legal recording of loan documents.
Once your loan closes, the origination phase is over, and you move on to Phase II, which is servicing. Servicing is everything that happens with your loan after the closing. That involves setting up the monthly payments, establishing the escrow accounts, collecting monthly payments, and making periodic payments for real estate taxes and insurance policies.
Servicing is also responsible for tracking the amortization on your loan, as well as sending out periodic notices to keep you up-to-date on the status of your loan.
Servicing is sometimes handled by the same lender that originates your loan. But in most cases, the loan will be transferred to another lender who will handle the servicing phase of the loan. In some cases, a lender will originate the loan, then transfer the servicing to another lender immediately after the closing.
Why Do Mortgage Lenders Transfer Service to Other Companies?
There are three primary reasons why mortgage lenders transfer service to other companies:
1. Some lenders only originate loans. Though lenders can earn revenue by both originating and servicing mortgages, some choose to do only one or the other. A particular lender may only originate loans, in which case every mortgage they originate will be sold after closing. This is particularly true of mortgage brokers and small banks.
2. To make room to originate more loans. Every time a lender makes a loan, it ties up capital. That will restrict its ability to make new loans. The solution to that dilemma is to transfer the loan to another lender. That restores capital to the originating lender, enabling them to make more loans.
3. To earn additional revenue. The term “transfer” is something of a consumer-friendly term to describe the process of selling the mortgage to another lender. That’s because the originating lender typically receives compensation from the sale of the loan. Selling the loan will result in two income streams on the same loan – the originations income, and the sale of servicing income.
The entire arrangement, from origination through the sale of servicing, is completely legal. It’s also completely normal! It’s a process that keeps the mortgage industry function efficiently. In fact, it’s more than likely that your loan will be transferred several times during the term. Servicing lenders frequently sell off portions of their servicing portfolios for a variety of reasons.
How a Loan Service Transfer Affects You
A lender is legally required to inform you that your loan may be or will be transferred to another lender at some point after closing. The practice is so common that it’s virtually standard language in mortgage closing documents. Even if you don’t remember being informed, it’s likely that you were at closing. However, it’s easy to forget since a mortgage closing is a fairly complicated event, that can leave you a bit…foggy.
But rest assured loan service transfers are usually painless affairs. The terms of your loan are spelled out in your mortgage and note. Those are legally binding (and recorded) documents that any future loan servicer is required to observe.
The biggest change you are likely to experience from a transfer is that you will be making your monthly payments to a different lender, with a different address from your original lender.
Your Rights in a Mortgage Loan Transfer
Not only do the original terms of your loan remain intact, no matter how many times your loan is transferred, but you also have certain rights as a borrower.
For example, you must be given advanced written notice of the transfer of your mortgage by the original servicer before the transfer actually occurs. They will have to let you know the date of the transfer, as well as the contact information for the new lender.
If you raise any disputes about the transfer, the new servicer is required to investigate your claims and make corrections within 60 business days. The new lender must also notify you of any changes to the terms of your homeowner insurance policy.
Perhaps most important, federal law requires that you are given a 60-day grace period during which you cannot be charged a late fee if you mistakenly send a mortgage payment to your old servicer. This will give you some wiggle room during the transfer phase. You must, however, be able to furnish proof that your payment was sent to the original lender.
What You Should Do When Your Mortgage is Transferred to Another Company
Though loan service transfers are common, you should take the event very seriously. You must be aware of when the transfer is going take place, and where you will need to send your payments from now on.
It’s also important to compare the first mortgage statement from your new lender with the last mortgage statement from your previous lender. This will be an opportunity to detect any errors from the very beginning when they will be easiest to correct.
As always, if there any details with which you are either confused or uncomfortable, you need to reach out to the new lender as soon as possible. They will typically provide a toll-free phone number specifically for this purpose.
Once the loan has been transferred, and you’ve made the first couple of payments, you’ll quickly settle into a new business-as-usual routine with the new lender. And after the first time your loan is transferred, you’ll understand that it’s really no big deal.