A Step-by-Step Guide to Selling a Loan

Selling a loan you originated can be a smart move for both profitability and risk management But where do you start when it comes to selling off loans? This comprehensive guide will walk you through the process step-by-step

Overview of Selling Loans

Lenders have a few options when looking to sell loans

• Sell to government agencies like Fannie Mae, Freddie Mac, and Ginnie Mae
• Sell to private investors
• Sell on the secondary mortgage market

Selling loans generates revenue and transfers risk away from the originator. It also frees up capital to originate more new loans.

Now let’s explore the specific steps involved in selling a loan.

Step 1: Preparing to Sell a Loan

First, identify which loans in your portfolio make the most sense to sell. Consider factors like:

• Loan purpose – Refinances may be better sale candidates than purchases
• Product type – Conventional, FHA, VA, jumbo
• Borrower profiles – Credit score, debt-to-income ratio
• Loan status – Current, delinquent

Next, gather documentation on the loans including the note, deed, payment history, title report, and appraisal. Buyers will review these during due diligence.

Make sure servicing release premiums are identified for any loans being sold servicing released. This compensates you for the lost revenue from servicing rights.

Step 2: Choosing Full vs Partial Sale

Decide whether you want to sell the loan entirely or keep a portion. Reasons for partial loan sales include:

• Earning servicing income
• Maintaining borrower relationships
• Limiting risk exposure while still retaining some interest

Do the math to see which meets your goals – full sale, partial sale, or keeping the whole loan.

Step 3: Selecting a Buyer

Research potential investors, lenders, and aggregators interested in purchasing loans. Options include:

• Mortgage bankers
• Commercial banks
• Credit unions
• Mortgage REITs
• Hedge funds
• Private equity firms

Consider sale goals, loan characteristics, pricing, reputation, and ease of process when selecting buyers.

Step 4: Getting a Price Quote

Contact buyers to solicit bids for the loans. Expect to provide details like:

• Loan amounts
• Interest rates
• Terms/type
• Credit stats
• Loan purpose
• Geographic distribution

Compare quotes and negotiate the best price. Remember to consider servicing release premiums for servicing released transactions.

Step 5: The Property Evaluation Process

Now the buyer will begin their due diligence, including:

• Collateral review – Checking appraisal quality, value conclusions, and underwriting decisions.

• Property valuation – Confirming the current home value and looking for red flags.

• Title review – Verifying clean title and checking for liens or other issues.

• Compliance audit – Ensuring lending regulations were properly followed.

You’ll provide requested documents and answer questions promptly to move the deal forward during this stage. Expect some back and forth before the buyer is satisfied.

Step 6: Closing the Sale, Final Steps

To complete the loan sale:

• Finalize the transaction details and create a loan sale agreement. This covers pricing, delivery processes, and representations and warranties.

• Sign over collateral documents and arrange for loan servicing transfer if applicable.

• Record mortgage assignments to formally assign loans to the buyer.

• Deliver funding proceeds from the sale.

• Report sold loans as necessary. Inform borrowers if you’re transferring servicing.

• Save key records for future reference in case of repurchase requests.

Tips for Maximizing Loan Sale Success

Follow these best practices when selling loans:

• Maintain organized, compliant loan files so collateral stands up to scrutiny.

• Build relationships with buyers so they’re eager to bid on your deal flow.

• Time sales strategically. Market dynamics impact pricing.

• Understand secondary market guidelines to avoid unwelcome surprises.

• Negotiate pricing aggressively to get the best execution.

• Set realistic expectations on timelines which depend partly on the buyer.

Evaluating Options for Loan Sales

Several factors come into play when deciding the best loans to sell and selecting the ideal buyer:

Loan Details

• Balance – Higher balances mean bigger dollar proceeds.
• Rate/term – Premium pricing for fixed over adjustable rates.
• Purpose – More demand for refinances than purchases.
• Product – Conventional loans attract the most buyers.

Market Conditions

• Interest rate moves – Lower rates spur refi boom and buyers.
• Economic outlook – Impacts investor appetite for risk.
• Supply and demand – When demand outpaces loan supply, prices increase.

Buyer Profile

• Reputation – Pick an established company with satisfied sellers.
• Pricing – Compare bids to get the highest reasonable quote.
• Requirements – Review guidelines to avoid complications.
• Servicing options – Retain or release based on your needs.

Evaluate these aspects, run the numbers, weigh alternatives, and select the optimal approach to sell your loans at the greatest gain.

Selling Loans With Confidence

Selling origination volume on the secondary market provides lenders several advantages. It brings in non-interest income, manages portfolio risk, and generates capital for more lending.

But loan sales involve important decisions on timing, loan selection, buyers, pricing, and processes. Follow the step-by-step guide outlined here for a smooth transaction that maximizes profits and establishes valuable investor relationships.

With the right preparation and knowledge, you can sell loans strategically to achieve portfolio targets and fuel your lending growth.