Some or all of the mortgage lenders featured on our site are advertising partners of NerdWallet, but this does not influence our evaluations, lender star ratings or the order in which lenders are listed on the page. Our opinions are our own. Here is a list of our partners.
You might be surprised or even upset to receive a letter telling you that your mortgage is being sold to another financial institution.
There’s nothing inherently bad about your loan being sold — the terms of the loan will not change. But you could run into problems if you fail to recognize the change. That could cause you to miss payments, costing you late charges and eventually hurting your credit score. Here’s a look at why mortgages are sold and how you can protect yourself.
If you have a mortgage, chances are your loan has been or will be sold at some point. It’s an extremely common practice in the mortgage industry. But why exactly do lenders sell off their loans, and what does it mean for homeowners?
When you receive that letter informing you your mortgage has been transferred, it can feel a bit unsettling. However, loan transfers are simply a normal part of the business. Read on to understand the reasons why mortgage companies sell loans, and why it really doesn’t impact borrowers much.
It Frees Up Capital For New Loans
One of the main reasons lenders sell mortgages is to free up their capital so they can issue new loans.
When a mortgage company funds a new home loan, they have to use their own funds or credit to provide the mortgage money to the borrower. This ties up a lot of the lender’s capital in long-term mortgage debt. By selling those loans off to investors, they get that capital back to make more loans.
It’s a cyclical system – lenders issue mortgages, sell those mortgages to investors, and use the proceeds to fund more mortgages. This recycling of capital allows lenders to provide more home financing opportunities to more borrowers.
They Can Earn Profits on Loan Sales
Mortgage lenders are also able to earn profits on the sale of loans. Often the loans are sold for slightly more than what the mortgage company initially funded them for
For example, a lender may provide a $200,000 mortgage at an interest rate of 3.5%. But when they go to sell that loan on the secondary market, mortgage rates may have dropped to 3.25%. Investors will pay a premium for that higher 3.5% rate. This allows the lender to make an additional profit on the sale.
It Limits Interest Rate Risks
When lenders hold mortgages for the long term, they face risks tied to interest rate fluctuations Rates change constantly in the market
By selling loans soon after origination, lenders can lock in profits and transfer the interest rate risk to the investor that buys the mortgage. This protects them from potential losses if rates increase in the future.
Loans Are Packaged and Traded as Investments
Once loans are sold by the original lender, they are traded on the secondary mortgage market between banks, investors, and government entities.
Mortgages are packaged together as mortgage-backed securities (MBS) for large institutional investors to buy. Government agencies like Fannie Mae, Freddie Mac, and Ginnie Mae guarantee these securities, making them lower risk investments.
Pension funds, hedge funds, REITs and more buy MBS to receive regular income from the mortgage payments made by the underlying borrowers. Trading mortgages as investments is now a multi-trillion dollar market.
It Allows Small Lenders to Compete
The secondary market for mortgages also helps smaller lenders stay competitive with larger banks.
Smaller lenders don’t have the same capital reserves as mega banks. But being able to sell loans soon after funding them puts those smaller players on a more even playing field. This gives consumers more choices when shopping for a mortgage.
Specialization in Servicing Loans Reduces Costs
Lastly, lenders sell loans so they can specialize in what they do best – originating new mortgages. The servicing of existing mortgages is then handled by other companies that specialize in loan administration.
These servicers have economies of scale and advanced systems to service mortgages at a low cost. This overall reduction in servicing costs makes lending more profitable for originators.
How Mortgage Transfers Work
When a lender sells your mortgage, there are a few steps that take place:
- The loan is sold to another bank, investor, or government agency
- Servicing rights are also transferred to a new servicer
- The servicer sends you a notification letter of the change
- You begin making your mortgage payments to the new servicer
Servicing involves collecting payments, processing tax and insurance payments, handling escrow accounts, and managing customer service. So the company you make your payment to each month may change.
Some other key facts about mortgage transfers:
- The original terms of your loan do not change
- Your interest rate, payment amount, loan balance stay the same
- Protections and regulations remain in place for your benefit
- Automated payments may need to be updated
- Additional loan servicing fees are not usually allowed
So in essence, the core aspects of your mortgage stay the same. Just the behind-the-scenes administration shifts over to new companies.
Impact on Borrowers is Fairly Minimal
For most borrowers, having your mortgage sold and transferred to another servicer has little real impact. You simply make payments to a new company.
However, there are a few things that may change:
- Where you send your payments each month
- Who you contact for customer service or questions
- Available payment methods or processing times
- Fees for certain servicing requests
In most cases, the transition is straightforward. But occasionally borrowers do report frustrations with new servicers if customer service declines or fees increase. Trouble paying on time can also occur if auto-debit features aren’t properly handled during transfer.
Overall though, the sale itself has minimal effect on borrowers themselves. It is more impactful behind the scenes for the banks and investors involved.
Tips for a Smooth Transition
If your mortgage is transferred, here are some tips to make for a smooth transition:
- Carefully review the notification letter from your new servicer
- Update auto-pay features to avoid any missed payments
- Log on and create an online account with the new servicer
- Verify escrow account balances transferred correctly
- Save payment receipts during the transition period
- Follow up if you don’t receive confirmation of payment receipt
- Check that hazard insurance information was updated
- Ask for fee waivers if allowed during the initial transfer
Staying organized and following up quickly on any issues will help prevent problems down the road.
You May Not Be Notified If Only Servicing Changes
One important note is that you may not receive any notification if only your loan’s servicing rights are sold, and the actual mortgage holder remains the same. This is common with major lenders like Chase and Wells Fargo who service many of their own loans.
Since your payments still go to the same mortgage lender, legally they aren’t required to send advance notification of a servicing change. Just know that behind the scenes, systems and personnel could change.
Your Loan Can Be Sold Multiple Times
Lastly, it’s important to understand your mortgage can be sold more than once. In fact, it’s not uncommon for a loan to be sold and transferred to new servicers two or three times over the life of the loan.
Investors continue to buy and trade mortgage securities on the secondary market. Your specific mortgage may end up in many different investment portfolios as part of this trading activity. Each time it’s sold, you’ll be notified of the change.
The Bottom Line
Mortgage companies sell loans as part of their normal business operations. This recycling of capital allows them to help more borrowers. It also reduces risks and servicing costs for lenders. When your loan is sold, the terms stay the same, and you simply send payments to a new servicer. While inconvenient at times, this practice helps keep mortgage funds flowing efficiently. So don’t stress too much if you get notification your loan was sold – it’s par for the course!
Why do mortgages get sold?
Many consumers don’t realize there’s a thriving market for loans, referred to as the secondary market. When you borrow from a bank, credit union or nonbank lender, the fine print may say the loan could be sold.
Lenders sell mortgages so they have money to lend to other borrowers. Some sell loans to other financial institutions but keep the servicing rights. In this case, the customer deals with the same lender and sends the payments to the same place. It hardly affects consumers, since the point of contact doesn’t change.
However, not all lenders have the capacity to continue servicing the loans they fund, so some lenders will make changes that include selling both the debt and the servicing rights. When that happens, customers have to send payments to a new company and deal with that new party if problems arise.
What happens next
When a loan changes hands, your debt goes with it, but the terms of the loan and your interest rate stay the same. When a loan is sold, the lender must send you a transfer notice within 30 days. It should contain information about the new loan holder, including contact details. If the notice says the loan’s servicing was also transferred, it’ll tell you where to send payments and when.
Why Your Lender Sold Mortgage
FAQ
What happens when a mortgage company sells your loan?
Is it bad for a lender to sell your mortgage?
Can a mortgage company sell your loan without your consent?
Why would a lender want to sell their loans on the secondary market?
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.
Who sells a mortgage loan?
In most cases, your lender will sell your loan to a large mortgage company like Fannie Mae or Freddie Mac, two U.S. government-sponsored entities that buy loans from banks and lenders. Loans are also frequently sold between private mortgage lenders and banks.
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