Youâve just received a letter informing you that your home loan has been purchased by an investor. You might feel upset or confused, since you carefully picked the mortgage lender you wanted to work with â does this change or jeopardize that?
We have good news: You donât have to worry. This is a totally normal part of the mortgage process.
Buying a home is likely the largest financial transaction most people will make in their lifetime After going through the mortgage application process, signing all the paperwork, and moving into your new house, you may be surprised to get a letter in the mail informing you that your mortgage has been sold to another company This can be confusing and concerning for homeowners who don’t understand why their mortgage was sold or what it means for them.
It’s a Common Occurrence
The practice of mortgage companies selling loans is extremely common in the industry. In fact, there is a good chance that over the life of your loan it will be sold multiple times to various investors and servicers. This is simply how the secondary mortgage market operates in order to keep funds flowing for new mortgages.
According to industry experts, an estimated 30-50% of mortgages will be sold at some point after origination. So if you receive notification that your mortgage was sold, don’t panic – it’s normal and happens all the time.
Why Do Lenders Sell Loans?
There are two main reasons lenders sell off mortgages:
1. To Free Up Capital
One reason lenders sell loans is to free up capital that can be used to originate new mortgages. Making mortgage loans is how lenders generate revenue. But the funds used to make those loans come from limited capital reserves.
By selling loans to investors lenders receive a lump sum payment in return. This gives them back the capital that was tied up in existing mortgages so they can then use it to fund new loans and generate more revenue. It’s a cycle that keeps capital revolving in the mortgage industry.
2. Generate Cash While Retaining Servicing Rights
Lenders also sell mortgages to investors as a way to immediately generate cash while still collecting ongoing servicing fees. In these cases, the investor purchases the mortgage loan itself while the original lender retains the rights to service the loan.
Servicing a loan includes collecting monthly payments, processing payments, and handling customer service duties. Lenders earn a small percentage of the loan’s interest payments – usually around 0.25% – for servicing.
Selling the loan provides quick cash, while keeping the servicing rights allows the lender to earn fees over the life of the loan. It’s a win-win for the lender.
The Secondary Mortgage Market
When a lender sells a mortgage loan, they are participating in what is called the secondary mortgage market. This is a system that keeps money flowing from investors and institutions into new mortgages.
Some key players in the secondary market include:
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Banks & Credit Unions: These traditional lenders sell loans to replenish their capital reserves so they can issue new mortgages. Smaller banks and credit unions in particular need to sell loans more frequently.
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Mortgage Banks: Non-bank mortgage lenders depend on selling loans since they don’t have depositor funds to draw from. Many will sell loans immediately after originating them.
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Fannie Mae & Freddie Mac: These government-sponsored enterprises buy mortgages from lenders and package them into mortgage-backed securities that are sold to investors.
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Private Investors: Wealthy individuals, hedge funds, pension funds, etc will buy mortgage loans as investments.
This diverse secondary market creates liquidity in the mortgage industry, allowing lenders to continuously make new loans.
What Happens When a Mortgage is Sold?
When your mortgage changes hands from one company to another, there are some things you should know to ensure a smooth transition:
The loan terms remain the same. Your interest rate, loan amount, and repayment terms do not change when your loan is sold. Those conditions are locked in.
You must be notified. By law, your lender must inform you in writing within 30 days that your loan was sold or transferred.
The servicer may change. Servicing rights don’t always stay with the selling lender. Sometimes the company buying your loan takes over servicing as well. This means where you send your payments could change.
Set up payments properly. If the servicer changes, be sure to cancel any automatic payments to your old servicer and set up new ones. Verify account details with new servicer.
Review your first statement. When you receive your first statement from the new servicer, review it closely to ensure your loan details and payment processing were properly transferred.
As long as you review notifications carefully, provide updated account details as needed, and setup payments correctly, your loan should transition smoothly when sold.
Pros and Cons for Homeowners
There are some potential advantages and disadvantages for homeowners when lenders sell off their mortgage:
Pros
- Your interest rate and loan terms remain unchanged
- Provides more mortgage options by keeping funds flowing in the industry
- Possible opportunities to negotiate terms if loan is distressed
Cons
- Disruption when servicer changes
- Customer service quality varies between servicers
- Potential errors from transfer miscommunications
For most homeowners, the pros outweigh the cons when it comes to mortgages being sold in the secondary market. As long as you stay organized and double check details when your servicer changes, it should not negatively impact your situation.
Tips for Homeowners
To make sure the sale of your mortgage goes smoothly, follow these tips:
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Open any mail from lenders immediately to check for sale notices.
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Review notices and verify if servicer is changing.
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Contact old and new servicers to tie up any loose ends.
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Cancel existing automatic payments if needed.
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Set up new automatic payments with the new servicer.
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Ask new servicer if old account number can still be used.
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Make 1st payment manually to ensure proper processing.
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Review your first statement from new servicer.
Staying proactive by communicating with your lenders and servicers, updating account details, double checking payments, and reviewing statements will help avoid issues.
The Bottom Line
Mortgage companies commonly sell loans as a normal part of their business operations. This activity in the secondary mortgage market provides lenders with capital to issue new loans and meet demand from home buyers. For most homeowners, the sale of their mortgage will be an inconsequential process as long as they pay attention to any servicer changes and stay organized. So don’t stress too much if you find out your loan was sold – it’s simply a standard practice!
See What You Qualify For
Again, itâs all about liquidity. Banks and lenders need to have enough money to extend mortgages to homeowners. With the real estate market constantly changing, financial security is important for all parties involved in the mortgage process.
Think about the typical 30-year loan term. If a mortgage lender has its money tied up in that transaction for the full 30 years, it will have less money to offer future mortgages. By allowing the mortgage to be sold to an investor, the lender now has the capital and money flow to continue to lend to other borrowers.
On a larger scale, this process is a part of how the mortgage market works. Investors keep the market liquid so lenders can continue to help borrowers purchase homes.
While selling mortgages is extremely common, itâs important as a homeowner to understand the process as well as who is involved. No matter where life takes you â whether thatâs a new home or a home refinance â weâre here to help you every step of the way. by see your options so you can make the best financial decision.
Who Sells Mortgage Loans?
After buying a home, you might receive a letter stating that your mortgage loan has been purchased by an investor. But who sold it? The short answer is banks and lenders.
Why are banks selling mortgages? Well, itâs all about liquidity. Banks and lenders need to have enough money to continue to offer mortgages to homeowners. Usually, the purchasing investor will be one of the three government-owned or government-sponsored corporations that deal in mortgages: Fannie Mae, Freddie Mac and Ginnie Mae. Occasionally, a smaller, nongovernmental investor will be the one to purchase your mortgage.
Before we get into the âwhyâ of mortgage investors, it may be helpful to first go over a few different terms.
A lender can also be a mortgage originator in the secondary market, and is an entity that lent you the money to purchase your home. Lenders are one of the first steps in buying a home considering the borrower will need to find an interest rate that works for their financial situation.
A servicer is the entity that handles your mortgage after youâve closed on your home. Theyâre the people you send your monthly mortgage payments to.
An investor is the entity that purchases mortgages from lenders and can be a mortgage aggregator as well. Investors include Fannie Mae and Freddie Mac, both of which purchase conventional loans, and Ginnie Mae, which purchases Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.
Sometimes lenders will retain the servicing rights on mortgages they originated, while the mortgage itself is purchased by an investor. This means that youâll still work with and make payments to the same company you got your loan with, but that company doesnât technically own the mortgage anymore. The servicer collects your payments and passes them along to the investor.
Try not to confuse the above terms with a bank, which is often used as a general term and doesnât really tell us anything about the entityâs role in your mortgage.
Why Your Lender Sold Mortgage
FAQ
What does it mean when a mortgage company sells your loan?
Can I stop my mortgage from being sold?
Is it bad for a lender to sell your mortgage?
How do banks make money selling mortgages?
Why does a lender sell a mortgage?
There are basically two main reasons why a lender might sell your mortgage. 1. To gain capital When a loan gets sold, the lender has basically sold servicing rights to the loan, which clears up credit lines and enables the lender to lend money to the other borrowers.
Why are home loans sold regularly?
Home loans are sold regularly for two reasons. The main reason is to allow lenders to afford to lend money to new home buyers. It’s common practice to sell mortgages so that lenders can get more money to help finance additional mortgages. The process is cyclical and continues from there.
Why do banks sell mortgages like you?
Let’s say the bank is lending you $200,000 to buy a home. Most mortgages last for 15 or 30 years — and you’re certainly not the only person taking out a mortgage. The bank would need to have billions of dollars in cash to issue loans to everybody. That’s one of the main reasons why it sells loans like yours. 2. To make money
Should a mortgage be sold to an investor?
Think about the typical 30-year loan term. If a mortgage lender has its money tied up in that transaction for the full 30 years, it will have less money to offer future mortgages. By allowing the mortgage to be sold to an investor, the lender now has the capital and money flow to continue to lend to other borrowers.