What to Do When Your Mortgage Is Sold
When you’re getting ready to buy a home, you spend a lot of time looking at mortgages, rates, and closing costs, then determining how much everything will end up costing you. You research mortgage companies, find out their reputations, and typically settle on one that has the most favorable terms, the lowest interest, and a strong financial background.
Then, after the home and sale has gone through, you notice that the name of the lender is completely different than the company you chose. After all that research and deliberation, your mortgage has been sold.
It can be daunting and a little unnerving. Know what to expect.
Parts of a Mortgage
When you apply for a mortgage, there are three aspects to that mortgage:
- The Loan Originator
- The Lending Company
- The Servicing Company
The person you will deal with in person is the loan originator. They do all the paperwork, and they help you apply for a loan. An originator sends the application to the lending company. If you meet their guidelines, they approve the loan, and you now have money to buy the house. The lending company may act as the servicing company as well, but it likely will sell your mortgage to another company. The servicing company is who you write your monthly check to pay off the house.
If you're shopping for a mortgage, it's good to go into the process while understanding that it is likely to be sold and what the pros and cons of the practice are.
Generates revenue for lenders
Makes mortgages accessible to more people
Unlikely to impact borrowers significantly
Reduces familiarity between borrowers and lenders
Can hinder loan modification efforts
Occasionally leads to errors
Why Mortgages Are Sold
Your loan originator gets paid a commission for each mortgage. The lender and the servicer, however, have to make their money back more slowly, usually over 15 to 30 years.
If a lending company serviced every loan that they funded, it would have to have many billions of dollars on hand to ensure it had the cash available to provide those loans. Most banks and institutions would quickly be strapped for cash if they serviced every single loan. Instead, they bundle together a bunch of loans with similar risk levels and sell them to investors like government agencies Fannie Mae or Freddie Mac. These investing companies sell them as bonds. By selling off loans, lending companies raise money so they can lend to more prospective buyers.
What to Expect With Your New Servicing Company
It’s a common practice for lenders to sell mortgages, and it’s entirely legal for them to do it without your consent. What they must do, however, is to provide you with a warning that your loan will be serviced by a different company.
Both the old loan owner and the new loan owner must send you notification no less than 15 days before the transfer. The new lender must provide contact details within 30 days after the transfer is complete so you know where to send payment and how to get in touch if you need help. And don’t worry if you send payment to the old lender; you get a 60-day grace period, so your loan won’t be delinquent if you make a mistake with that first check going to the old company.
What about the details of the mortgage? Your payment will stay the same unless you have an adjustable-rate mortgage (ARM), in which case the interest could adjust. Your loan will continue to function the same as it did with the old lender, so if you had 19 years left until it was paid off, you still have 19 years left. The only difference is going to be the name of the company that you write on the check and the address where you send it.
One thing that may have a big effect on your finances is the terms for a loan modification. There are programs available that allow you to work with your lender to modify the terms of your loan, so it is easier for you to pay your bills. If your loan is sold while you are going through the modification process, you likely will have to start all over.
How to Avoid Having Your Mortgage Sold
There is a clause in most mortgage contracts that says the lender has the right to sell the mortgage to another servicing company. If you’re getting a notice that your loan is being sold, you have two options: go along with it, or refinance with another company.
If you have yet to sign the paperwork, there are ways you can guarantee that your loan will be owned and serviced by the originating company. All you have to do is ask. Big mortgage lenders, like nationwide banks, won’t make that promise. Smaller, more local lenders, like credit unions, might. If you want to avoid having your mortgage sold, start your search with local banks and credit unions.
The bottom line is that your mortgage is likely to be sold. It helps to keep interest rates competitive, it spurs the economy, and in all actuality, it’s not very likely to lead to any problems. But keep in mind that mistakes do happen. The process is generally seamless, but errors occur. If you notice that your payment has changed, the terms have changed, or something doesn’t seem right, start by calling the new loan servicing company. If that doesn’t work to get things straightened out, you can file a claim through the Consumer Financial Protection Bureau.