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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’ve taken out a mortgage loan to buy a home, you may have received a notice at some point saying that your mortgage has been sold to a new company This can feel surprising and concerning when it happens Why does your mortgage keep getting passed around to new companies or investors?
There are a few key reasons mortgage loans get bought and sold multiple times after they are originated Understanding what’s behind this practice can help you feel better prepared when you get notification that your mortgage has been transferred
Mortgage Lenders Often Don’t Hold Loans Long-Term
Many lenders specialize in originating mortgage loans but don’t keep those loans on their own books for the full 15 or 30 year term. Instead, they sell off the loans shortly after origination to free up capital to fund new mortgages. This keeps the lending process moving efficiently.
The initial lender makes their profit by collecting fees for originating, processing and closing your loan. They earn revenue upfront without having to wait decades to collect all your mortgage payments over time.
Selling off loans also reduces risk for the original lender. They don’t have to worry about defaults down the road or interest rate changes affecting the value of your loan on their balance sheet.
Loans Get Packaged and Traded as Securities
Behind the scenes, your individual mortgage may get packaged together with many other mortgages by an investment bank into a mortgage-backed security (MBS). The MBS can then be sold to institutional investors like pension funds, hedge funds, REITs, and more.
Trading MBS on the secondary mortgage market provides constant liquidity and influx of new capital into the mortgage industry. This benefits home buyers by keeping funds flowing for new loans.
As investors trade the MBS containing your loan between each other, you’ll get notices about your mortgage being transferred to new companies. But this securities trading occurs behind the scenes and has no direct effect on your loan terms.
Mortgage Servicing Often Gets Sold Separately
When your mortgage gets sold, the loan servicing rights may be sold separately from the loan itself. Servicing includes collecting your payments, handling escrow accounts, and customer service duties.
Specialized companies focus on servicing mortgages they didn’t originate. Lenders sell servicing rights to generate income without having to collect payments long-term. Companies can make money on the servicing fees without funding the actual loans.
When servicing rights get sold, you’ll have to start sending payments to the new servicer. But your interest rate and loan balance won’t change.
Benefits for Homeowners
The constant trading and selling of mortgage loans in the secondary market has some key benefits:
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It makes mortgages more affordable overall by keeping funds flowing for new loans at competitive rates.
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It reduces liquidity risk for original lenders, encouraging them to lend.
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Investment banks can generate profits by repackaging loans into securities.
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Specialized servicers can focus on their expertise without originating loans.
So while it can feel unsettling when your mortgage gets sold, this system allows lenders to originate more loans at better rates. Without the secondary market, mortgage lending would be much more constrained.
What to Do When Your Mortgage Is Sold
When you get a notice that your mortgage has been sold or transferred to a new company, here are some tips:
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Review the details carefully. Make sure you understand if the loan itself is being transferred or just the servicing rights.
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Check that your contact information is current. This ensures the new servicer has your correct mailing address and contact details.
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Update any automatic payments. You may need to redirect auto-pay through your bank to the new servicer.
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Watch for confirmation. Review statements to confirm your first payment to the new servicer went through as expected.
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Keep records. Hold on to all statements and notices related to the servicing transfer in case any issues crop up.
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Reach out with questions. The notice should include contact information for your new mortgage holder or servicer if you need clarification.
While mortgage transfers can be annoying logistically, they don’t affect your loan amount, interest rate, or repayment terms. The constant trading of mortgage debt in the secondary market ultimately helps homeowners access affordable financing. So when your lender sells your loan, view it as part of the behind-the-scenes financial machinery that powers the entire mortgage system.
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 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.
Your mortgage was sold! Now what?
FAQ
Why would my mortgage be sold?
Is it bad for a lender to sell your mortgage?
How can I avoid getting my mortgage sold?
Why do mortgage loans get transferred?
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 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
Can a loan be 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.
Why do banks sell loans?
When banks sell loans, they are really selling the servicing rights to them. This frees up credit lines and allows lenders to pass out money to other borrowers (and make money on the fees for originating a mortgage). Remember, lenders and banks might be making big profits, but they don’t have a limitless amount of money lying around.
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.
Who sold a mortgage loan after buying a home?
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, it’s all about liquidity. Banks and lenders need to have enough money to continue to offer mortgages to homeowners.