For most first time home buyers, choosing a lender and securing that first mortgage is a monumental step. A relationship is established between the borrowers and the lender, the terms and interest rate are finalized along with the monthly payment amount into a neat and tidy package. Then without warning, those trusting borrowers receive a notice that their home loan has been sold to another firm. Whether they had a healthy relationship with a local lending institution or obtained home financing online, discovering that a home loan has been sold to another lender can come as quite a surprise. What does this mean and why did it happen?
This practice is very common within the mortgage industry. It can also happen more than once. Lenders “sell” or “transfer” what’s known as the “servicing” of a loan to other financial institutions. The transfer or sale can take place within mere months or several years after the loan’s origination.
See related post, “What is Mortgage Servicing?”
The new firm will be in charge of servicing the loan, which entails receiving the monthly payments, taking care of the escrow accounts, insurance and taxes. They are also accountable to the borrower now – and should be just as accessible as the original lender – to provide guidance and answer questions.
Loans are often sold as a package deal in a bundle with other loans. Sometimes prior to the exchange, borrowers learn that the first mortgage company specializes in loan originations. For such lenders, it is beneficial, because they just handle originations and do not have the task of servicing all of those loans. Should this happen, borrowers need not worry that there is any problem with their loan or their credit. Although lending firms that transfer loans to other financial institutions are not required by law to obtain permission from the borrower, they are required to inform them after the fact.
Ideally, both lenders, the first one and the new one, should notify the borrower 5 to 15 days before the next house payment is due. Essentially, the borrower should receive a “thank you/goodbye” letter from the original mortgage provider and a “welcome” letter from the new lender. All of the details should be given such as the new mortgage firm’s name, a personal contact, physical address, e-mail address and phone number. Details should also include where mortgage payments may be sent and when they are due. If the two notifications are not received within 3 to 5 days of each other, the borrower should take action to confirm exactly what is happening with their loan. No one should ever assume that it is being “handled” – that’s how folks inadvertently get behind on their payments.
Other important considerations are confirmation that the new firm has your correct address and all contact information. If the monthly mortgage was paid electronically, then the borrower needs to take the required steps to have the funds sent to the new lender. This will likely involve a visit to the bank and signed paperwork confirming that this is where the monthly payment will now be sent. Failing to take care of all of these vital details can cause headaches in the way of late charges and other penalties.
Borrowers should also rest assured that such a transaction does not affect the terms or conditions of their mortgage in a negative way. Everything should be just as it was prior to the sale of the loan, including the interest rate and length of the loan. There is a chance that the taxes and insurance could fluctuate-and make the amount of escrow go either slightly up or down. Borrowers with ARMs or adjustable rate mortgages will need to confirm that the original conditions will remain in place. It is always best to review all of the details provided when such a transaction occurs-take notes, formulate questions and get all of the facts from the new lender holding the mortgage.
As for the original escrow account, it is the responsibility of the first lending institution to inform the borrower’s insurance company and the tax offices about the transfer. Due to the magnitude of this financial responsibility, the borrower should always double-check to ensure that all of the necessary details have been taken care of. When dealing with any of these entities, always ask them to relate your contact information so you can confirm that it is correct!
The new lender will next analyze the status of your escrow to make sure that it is enough to cover insurance and other fees that are paid through that account. In case the lender feels that the escrow amount falls short, a borrower may be asked to increase the amount of their monthly house payment.
Other issues to address when a loan is sold are:
- Confirmation of which lender will be making the report on the amount of interest the borrower paid for income tax purposes.
- All insurance firms that the borrower has accounts with such as fire/hazard, life/disability, medical and of course, homeowners, must be made aware of the switch. Never assume that it has been taken care of.
- If there are any points that are unclear after the transfer, the borrower must be pro-active to obtain answers.
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