The Ultimate Guide to Loan Servicing Companies for Seller Financing

When you sell real estate with owner financing, the most important ongoing task you need to oversee is getting paid.

Make no mistake, when you sell a property with seller financing, you are forming a long-term relationship with that borrower, and any good relationship takes effort to manage (some more than others).

If you want to avoid tension with your borrowers, you need to be clear with them about a few things,

In the banking world, this job is known as loan servicing. Its not the most glamorous task, but it is critical to keeping a lending operation running smoothly.

Seller financing has become an increasingly popular method for buyers and sellers to complete real estate transactions. With seller financing, the seller acts as the bank and provides financing directly to the buyer. This arrangement allows buyers who may not qualify for traditional bank financing to still purchase a home. It also gives sellers an alternative exit strategy if they can’t sell the property outright.

However, seller financing brings added responsibilities and risks for sellers. As the financing provider, the seller must have the systems and expertise to handle tasks like collecting monthly payments, maintaining escrow accounts, sending payment reminders and late notices, reporting to credit bureaus, and following lending regulations. For most sellers, managing the financing end is quite burdensome and time-consuming.

This is where loan servicing companies can provide tremendous value. Loan servicers specialize in handling all the financing administration on the seller’s behalf. They take care of collecting payments distributing funds properly and providing reporting. This frees up the seller to focus on other areas of their business.

In this comprehensive guide, we’ll explain everything you need to know about loan servicing companies for seller financing transactions.

What is a Loan Servicer?

A loan servicer is a company that handles the day-to-day tasks of managing mortgage loans and other financing agreements The servicer acts as an intermediary between the borrower (buyer) and lender (seller),

The primary responsibilities of a loan servicer include:

Collecting monthly payments from borrowers
Maintaining escrow accounts for taxes and insurance
Sending payment reminders and late notices
Handling defaulted loans and foreclosures
Providing customer service for borrowers
Reporting payment information to credit bureaus
Distributing payments to senior lienholders
Remitting remaining funds to the seller/lender

In essence, the servicer handles all the operational aspects of servicing the financing so the seller doesn’t have to.

Why Use a Loan Servicer for Seller Financing?

Here are some of the top reasons for sellers to utilize a professional loan servicing company:

Streamlined Payment Processing

A loan servicer handles all payment collection and distribution, saving the seller significant time and hassle. Payments are collected from the buyer on the seller’s behalf and allocated properly each month.

Escrow Account Management

The servicer can manage escrow accounts for property taxes and insurance, ensuring these costs are paid on time. This protects the seller’s interest in the property.

Customer Service

Borrowers have a customer service contact for questions and concerns about the financing. The servicer fields calls and emails so the seller doesn’t have to.

Payment Reminders and Late Notices

Servicers automatically send out payment reminders and late notices to delinquent borrowers per the financing agreement. This helps prevent defaults.

Credit Bureau Reporting

Many servicers report the loan details and payment history to credit bureaus each month. This can help the buyer build their credit through on-time payments.

Debt Collection

If the buyer does default, the servicer handles the collections process on the seller’s behalf, potentially including foreclosure proceedings.

Regulatory Compliance

Servicers keep up with lending regulations, disclosure requirements, and more. This helps reduce compliance risks for the seller.

Improved Buyer Perception

Having a professional servicer involved gives buyers greater confidence in the financing arrangement.

Frees Up the Seller’s Time

With the servicer handling administration, the seller has more time for other business activities like finding more deals.

How Much Do Loan Servicers Charge?

Loan servicers generally earn revenue through a percentage of the monthly mortgage payments collected from borrowers. Their fees are stated as “basis points” – each basis point is equivalent to 0.01%.

For example, if the servicer charges 25 basis points on a $1,000 monthly mortgage payment, its fee would be $2.50 for that payment ($1,000 x 0.0025).

Typical servicing fees range from 10 to 50 basis points per monthly payment. Some additional charges may apply for set-up, paying off the loan early, or default servicing.

Here are average pricing estimates:

Set-up fee: $195 to $395 one-time
Monthly servicing fee: 15 to 50 basis points
Early pay-off fee: 0 to 3% of loan balance
Default servicing fees: 5% to 10% of monthly payment

So for a $100,000 mortgage with a 6% rate and 30-year term, the monthly payment would be around $600. If the servicer charged 25 basis points, its monthly fee would be $15. The total annual cost would be approximately $180.

Servicers provide economies of scale that usually make their fees quite affordable compared to the seller handling everything internally. Make sure to shop around and compare pricing.

Important Factors When Selecting a Loan Servicer

As you evaluate loan servicing companies, here are some key considerations:

Reputation & Experience

Look for an established company with a track record of satisfied clients and years of specialized experience in servicing seller-financed deals. Check online reviews.

Services Offered

Consider which services are included in the base pricing versus any extras you may need to add-on. Do they meet your needs?

Reporting Capabilities

Confirm the servicer provides detailed reporting on payment processing, account status, etc. Can they report to credit bureaus?

Compliance & Oversight

Review state licenses, compliance procedures, auditing, and quality control measures. This ensures proper oversight.

Customer Service

Assess the servicer’s borrower support and how they handle inquiries or issues. Read sample correspondence they send.

Default Servicing

Understand how the servicer handles missed payments, collections, and foreclosures if needed. Compare capabilities.

Pricing

Compare set-up fees, monthly servicing rates, and additional charges across multiple providers. Get an estimate for your deal specifics.

Take the time to do thorough due diligence before selecting your loan servicing partner.

Top Loan Servicing Companies for Seller Financing

Now that you understand the advantages of using a professional loan servicer for seller financing deals, let’s look at some top companies to consider:

LoanCare

One of the largest servicers, LoanCare handles over $100 billion in loans. They focus primarily on residential deals and offer comprehensive services with online account access.

LoanServ

A leading commercial servicer, LoanServ provides specialized CRE expertise. They service all loan types and offer borrower web portals.

Axia Financing

Serving small balance commercial and residential loans nationwide, Axia provides customized solutions including credit bureau reporting.

Sutherland Mortgage Services

With over 50 years of experience, Sutherland services loans of all sizes across an array of asset classes.

Lender Club

Originally a P2P lender, they now offer third-party servicing for other lenders. Platform has wide capabilities.

Cenlar

A large servicer with over 2 million loans managed, Cenlar has retail, wholesale, and subservicing options.

The Money Source

Focused on non-bank lenders, brokers, and investors, they offer flexible solutions for specialized financing.

First Guaranty

Servicing mortgage loans since 1949, their relationship-focused approach provides white-glove service.

This is just a sample of reputable national servicers to consider. Also look for capable regional players in your area.

The Servicing Process Step-By-Step

If you decide to utilize a professional loan servicer, here is a general overview of how the relationship will work:

Origination – You close the seller financing deal with the buyer. Execute promissory note, mortgage, etc.
Boarding – Send loan documents to servicer. They review files, set up accounts, send welcome letter to borrower, etc.
Servicing Starts – On first payment due date, servicer starts collecting scheduled payments from buyer. Manage taxes, insurance, credit reporting, etc. per servicing agreement.
Ongoing Administration – Servicer handles all loan administration functions on your behalf month-to-month for the life of the loan.
Reporting – They provide updates and statements on payments, account status, etc. per your specifications.
Early Pay-Off – If buyer pays loan off early, servicer will collect funds, distribute to you, and provide final reporting.
Default – In event of non-payment, they will pursue collections and foreclosure per guidelines.
Change Requests – Contact servicer any time to make adjustments to the loan, account, or servicing arrangement.

The seller retains ownership of the mortgage – the servicer simply handles the ongoing administrative tasks.

Get Started Using Loan

Option 1: In-House Loan Servicing

When I closed my first few seller-financed deals, I decided to service them myself.

I used some loan amortization software to figure out what each borrowers payment amount and schedule should look like, and they mailed checks to me each month.

I quickly realized this was a horrible way to collect payments on my owner-financed properties. It required way too much effort for both parties to send, receive, and deposit the money each month.

Even when everything is functioning properly, it was probably the highest-friction way to get the job done. When you multiply this friction by ten, twenty, or thirty borrowers, it turns into a living nightmare pretty quickly.

Different Ways to Collect Payments

Depending on the number of loans you have on your books, loan servicing can be a big task!

This is especially true if the borrower wasnt qualified and underwritten with care when the loan first came into existence.

Every missed or late payment will create new points of tension that the loan servicer will have to step in and resolve.

One way to make the loan servicers job easier is to reduce friction in the payment process. Make it as effortless as possible for the borrower to send in their payment each month.

Better yet, make it easy for the borrower to get answers to their questions. Questions such as,

Whats my loan balance?
When is my payment due?
Where do I send my payment?
How much interest did I pay last year?

This information should be readily available in a place your borrower can easily access and understand, so they dont have to waste their (or your) time calling YOU when these basic questions come up.

Why you NEED to use a Servicing Company

FAQ

What is a fair interest rate for seller financing?

The term of the seller note is usually similar to that of a bank. For a service business which sells for $500,000, for example, the transaction might be structured as $150,000 down from the buyer and $350,000 in seller financing. The seller note might run for five to seven years and carry an interest rate of 8% to 10%.

What are loan servicing companies?

Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, manages your escrow account (if you have one). The loan servicer may initiate foreclosure under certain circumstances.

What is the difference between a servicer and a subservicer?

A “servicer” handles the daily management of loan accounts. Sometimes, the party that owns the loan (called the “holder”) also services it. In other cases, the holder sells the right to service the loan to a different company. (And, other times, another party known as a “subservicer” handles the servicing.)