Loan servicing is an essential function for lenders, as it helps ensure that loans are repaid in a timely and efficient manner. Borrowers should be aware that most mortgages today have servicing transferred more than once.
What is loan servicing?
Loan servicing is the process of administering and managing a loan after it has been approved and disbursed to the borrower. It may include any or all of the following:
- Managing the borrower’s account
- Sending monthly statements
- Collecting and processing payments
- Collecting and paying taxes and insurance
- Sending funds to the note holder
- Handling any delinquencies or defaults
- Maintaining records
- Communicating with the borrower
- Handling any issues that arise during the life of the loan
Who does loan servicing?
Loan servicing today is a huge industry and can be performed by the original lender or by a third-party servicing company. Examples of companies that may handle loan servicing include:
- Bank or financial institution that issued the loan
- Non-bank entity specializing in loan servicing
- Third-party vendor for the lending institution
Loan servicing is an essential function for lenders, as it helps ensure that loans are repaid in a timely and efficient manner. It also provides a source of recurring revenue for servicing companies (see below). Be aware that most home loans today have servicing transferred more than once.
Do mortgage brokers service loans?
No. Mortgage brokers are typically only involved in the origination of loans. This involves connecting borrowers with lenders who can provide the financing they need to purchase a home or refinance an existing mortgage. Once a loan has been originated by the broker, it is serviced by the lender or a third-party loan servicing company.
However, while mortgage brokers may not service loans, they still play a big role in helping borrowers manage their mortgage payments. For example, brokers can help borrowers find a new lender if they need to refinance their mortgage.
How do loan servicers make money?
Loan servicers are compensated by retaining a relatively small percentage of the outstanding balance — Known as a servicing fee or servicing “strip.” This fee usually amounts to 0.25 to 0.5 percentage points of each periodic loan payment.
Example: If a monthly mortgage payment is $2,000 and the servicing fee is 0.25%, the servicer is entitled to retain $5 (0.0025 x $2,000) of each payment before passing the remaining amount to the note holder.
Loan servicing fees
Beyond the basic services covered by the loan servicer’s contract with the mortgage owner, servicers may charge additional fees directly to borrowers. These fees can vary depending on the type of loan you have, the terms of your loan, and the policies of the loan servicer. Some common additional fees include:
- Late payment fees: If you miss a payment or pay your mortgage after the due date, the loan servicer may charge a late payment fee. The amount of this fee will depend on the terms of your loan and the policies of the loan servicer.
- Mortgage recast fees: When you “recast” your mortgage, you make a large payment toward your loan’s principal balance. Your lender then recalculates your monthly payment so that your monthly payment decreases while the loan term remains unchanged.
- Escrow fees: If your loan includes an escrow account for paying property taxes and homeowners insurance, the loan servicer may charge an additional fee for managing this account.
- Document preparation fees: If you request certain documents, such as a payoff statement or a copy of your loan documents, the loan servicer may charge a fee for preparing these documents.
Important: Carefully review your loan documents and any communications from your loan servicer to understand what fees you may be charged and when they are due. If you have questions about any fees, contact the loan servicer directly.
Can loan servicers change over the term of the mortgage?
Yes. It’s not uncommon for mortgages to be sold or transferred to another lender or servicer. When this happens, borrowers will receive a notice informing them of the change and providing details about the new servicer.
Borrowers should keep track of any changes to their loan servicing, as they may need to update their account information or payment methods. They should also review their account statements and ensure that their payments are being properly credited to their loan.
What should you do if your loan servicer changes?
If your loan servicer changes, there are a few things you should do:
01. Review the notification
Carefully read any notification you receive from your new loan servicer. This should include information about the effective date of the transfer, the new servicer’s contact information, and how to make payments going forward.
02. Update payment information
If you have automatic payments set up, you may need to update your payment information with the new loan servicer. Double-check that your payments are going to the correct address or account number to avoid any late fees or penalties.
03. Check your account
Once your loan has been transferred, check your account with the new loan servicer to ensure that all the details are accurate, such as loan balance, interest rate, and payment due dates.
04. Contact the new servicer
If you have any questions or concerns about your loan or loan servicing, contact your new servicer to get clarification.
05. Keep records
Keep records of all communications with the old and new servicers, including any notices, letters, or emails. This will help you keep track of any changes to your loan and payments, and may be necessary down the line to clear up any confusion regarding exactly when the servicing change was made.
Important: Stay proactive and informed when your loan servicer changes. By taking these steps, you can help ensure that your loan is being properly serviced and that you avoid any potential issues or misunderstandings.
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