If you’ve ever asked yourself that question, you’re not alone. Businesses sell mortgage loans all the time and the involved parties don’t think you need to know why. But in my experience, homeowners feel better about the process when they understand what’s happening.
How Your Mortgage Loans Generate Revenue
A mortgage-related business can play three different roles:
- The Loan Originator. Origination fees reimburse the company that processes your mortgage application. It covers their work in finding the right loan program and doing all the paperwork required to process a mortgage application.
- Servicer: A mortgage servicer is responsible for the ongoing administration of your loan. That includes recording payments, distributing money for your property taxes, and paying your property insurance. The servicer receives the portion of your monthly payment that pays for administration.
- Owner: The owner of the mortgage carries your debt and receives the interest you pay each month.
Mortgage Loan Scenarios
Take a look at these different scenarios to understand how a mortgage loan is managed.
You Obtain a Loan from a Mortgage Lender
If you obtain a loan from a Mortgage Lender, initially that company may take on all three roles. Typically, the Mortgage Lender is a bank or other financial institution.
- The Lender acts as a Loan Originator and makes money from the origination fees.
- The Lender is the Servicer and makes money from the monthly administration fees incorporated in your monthly payment.
- The Lender is a bank or other financial organization. The Lender is the Owner of the loan and provides the capital to pay off the property owner you purchased the property from; the Lender makes money from the interest you pay every month.
You Obtain a Loan from a Mortgage Broker
The Mortgage Broker acts as the Loan Originator. They make money from the origination fees, and they may also receive a commission from the Mortgage Lender they thought offered the best mortgage loan for your financial situation. After the loan is closed, the Mortgage Broker has no ongoing involvement, and the Lender acts as the Servicer and Owner.
How Mortgage Lenders May Change Their Role
A mortgage lender may change their role in various ways.
- The Lender May Transfer the Servicer Role. Sometimes the Lender wants to concentrate their efforts on financing loans and doesn’t want to maintain the staff to act as Servicers. In that case, they may transfer the Servicer role to a business that specializes in servicing loans. You will receive a notice that the new Servicer is taking over the administration of your loan.
- The Lender May Sell the Loan But Retain the Servicer Role. The Lender may decide to sell the loan to another Owner. The original lender will still make money from servicing the loan. Lenders typically sell loans to free up their capital to make new loans. You will receive a notice that a new Lender has purchased your loan.
- The Lender May Sell the Loan and Transfer the Servicer Role. If your original Lender wants to stop servicing your loan and wants to sell the loan to free up capital, they will sell your loan and transfer the Servicer Role. You will receive a notice that both transactions have taken place.
Freeing up capital is an important issue for Mortgage Lenders. Each Lender only has a specific amount of money to fund loans. If they keep all the loans they make, it reduces the amount the money they have available to fund new loans.
Another incentive for a Lender to sell loans is the premium they receive on the transaction. Most often, a large lender will bundle a number of loans together and sell them for a percentage of the value of all the loans. For example, if a Lender sells loans totaling $10 million at a one percent rate, they will get that $10 million back to use for new loans. Plus, they’ll make $100,000 on the transaction.
Selling your loan is a simple business decision. It doesn’t mean that the Lender is in trouble, or that your loan isn’t a good investment.
Who Do You Deal With After Mortgage Loans are Closed?
In general, you won’t have interaction with the Owner of your mortgage loan. They’re just the money people. You will work directly with the Servicer. A good Servicer can make your life very easy. A bad Servicer can make errors when making distributions, or accounting for the payments you make, the interest you owe, and more.
Unfortunately, you don’t have control over who services your loan. Your lender doesn’t need your permission to transfer servicing, but they do need to notify you if they transfer servicing. If you’re concerned about the servicing of your loan, ask your loan originator if they service their loans themselves.
Loyalty Shouldn’t Always Be a Big Factor in Your Choice of Mortgage Loans
One lesson you learn from understanding how mortgage loans work is this: It doesn’t always make sense to choose a loan program strictly based on the Originator. For example, if you choose to get a mortgage loan from your long-time bank, it had better be the loan with the best terms on the market. Unless your bank says they service all their loans, you may not retain your relationship with that bank throughout the life of your mortgage loan.
For most people, the important thing is to find the best interest and loan terms for their financial situation. Once that loan is closed, the terms of the loan won’t change, regardless of how many Owners or Servicers get involved. If you find a Lender who also services their loans, it’s likely that their loans are more expensive. You’ll need to decide if avoiding changes in Owners and Servicers is worth the additional cost.
If you’re thinking of buying or selling Davie real estate, the professionals on the Teri Arbogast team can help you find the perfect home and give you additional insight on financing options. Feel free to call us at 954-242-8030, or send an email. Let our experience and award-wining sales performance work for you!