Article Excerpt
Lenders sometimes transfer mortgage loans. How and why do they do this? More importantly, what does it mean for homeowners?
After going through the entire process of qualifying for a mortgage, applying to a lender, getting approved for a loan, and closing on a new home, many homeowners are perplexed when a completely different company contacts them to announce that it will now be servicing their loan. How does this happen, and what does it mean?
The good news for borrowers is that mortgage transfers do not affect the terms of their loans. The only difference is likely to be where you send your monthly payments. Since you asked, though, here is more information about how and why lenders and mortgage servicers transfer mortgages around.
How do mortgages get transferred?
From a lender’s perspective, a mortgage is both a contract and an asset. The lender and the borrower enter into a contract in which the lender promises to loan money to the borrower, and the borrower promises to pay it back according to a set of terms addressing interest, monthly payments, escrow for taxes and insurance, and so on. Once the lender has loaned the money, their main job is complete. All they have left to do is continue to abide by the contract’s other terms.
The mortgage is now also an asset for the lender. The borrower is obligated to repay a certain amount with interest to the lender. This right to receive payments is an asset that the lender can transfer to someone else.
In theory, a borrower can also assign the obligation to make payments to a third party. Without the lender’s agreement, though, the borrower will always be on the hook for the monthly payments since their name is on the loan paperwork.
With this in mind, let’s look at how both borrowers and lenders might transfer a mortgage.
Transfer by the Borrower
Most mortgages also include language prohibiting borrowers from transferring or assigning the obligation to make mortgage payments. A “due on sale” clause in most mortgages requires a borrower to repay the balance of the loan when they sell the home.
Suppose a borrower owns a home valued at $500,000, with a mortgage balance of $300,000. They might want to sell the home to a buyer for $200,000 and have the buyer take over the mortgage. The due-on-sale clause would prevent them from doing that. For this reason, mortgage transfers by borrowers are very rare.
Transfer by the Lender
Mortgage transfers by lenders are quite common. Unlike the borrower’s ongoing obligation to make payments, the lender only has to receive payments and enforce the debt. Many lenders use third-party companies known as loan servicers to handle the receipt of payments. The servicer receives a fee for each payment they process for the lender. Other companies, known as loan originators, often handle the process of issuing loans. They might hand everything off to a loan servicer after closing.
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Many lenders sell loans to Fannie Mae or Freddie Mac. A 30-year, $500,000 mortgage, if paid in full over 30 years, would yield far more than $500,000 because of interest. Fannie Mae or Freddie Mac might pay a discounted amount to a lender for that loan. They would then be the “owner” of the loan, and they would use a loan servicer to collect payments. Many borrowers only interact with the servicer handling their loan, and have no idea who the owner is.
Mortgage paperwork usually takes all of this into account. While borrowers are not allowed to assign their obligations to anyone else without permission from the lender, clauses in the loan agreement allow lenders to assign or sell the debt to someone else. The assignee or buyer would then have the right to receive payments from the borrower.
Why do mortgages get transferred?
Fannie Mae and Freddie Mac exist for the specific purpose of buying mortgage loans from the lenders who originated the loans. By doing this, they provide those lenders with cash to continue making more loans to homebuyers. More people are able to obtain mortgages and buy homes. The mortgages that Fannie Mae and Freddie Mac buy go into a secondary market, where investors buy and sell them.
The owner of a mortgage loan might switch loan servicers for any number of reasons. Perhaps they are dissatisfied with one servicer’s work, or perhaps they have other reasons. The important point for borrowers is that the effect on them will be minimal.
How do mortgage transfers affect homeowners?
If the lender who originated a loan, and whose name appears on the loan paperwork, transfers the loan to someone else, the interest rate, repayment period, and other terms of the loan remain unchanged. If the loan has an adjustable rate, the new lender cannot adjust more than whatever the loan agreement allows.
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The main issue that borrowers face is that the loan servicer and the address where they send payments are likely to change. A lender must notify borrowers when they sell or transfer a mortgage. The new mortgage servicer has thirty days to inform borrowers of where to start sending payments. You should read these notifications carefully because they will have important information.
Borrowers typically get a grace period of sixty days after they receive notice of a new loan servicer. If they accidentally send a payment to the old servicer during this time, they will not face a penalty.
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