A mortgage lender is a bank or financial company that lends money to borrowers to purchase a home. A mortgage servicer handles the payment processing and is the company that sends the monthly statements to the borrower. A mortgage lender or bank can be both the loan provider and the servicer of the mortgage. Both a lender and loan servicer have specific policies and procedures that they're required to follow, and both are regulated by the federal government.
The mortgage lender is the bank or credit union that most people interact with when applying for a mortgage. The mortgage representative at the local bank will educate the borrower about the various types of mortgages, the interest rates for each product as well as how much to spend for the downpayment.
The borrower will have to submit proof of income such as pay stubs and other financial information when applying for the loan. The lender will also perform a credit check, which is a review of the borrower's credit history, number of accounts open, amount of debt, and payment history. Any negative information on the credit report, such as late payments, will impact the odds of approval and the interest rate charged by the lender. Once approved, the local bank or lender will host the closing, which is when the paperwork is signed, and the mortgage is legally put on the books.
For the life of the mortgage loan, the borrower will owe the lender for the amount borrowed to buy the home, plus interest. Each of the monthly payments will go to paying down the mortgage whereby a portion of each payment will pay the interest owed on the loan. Another portion of the payment will go to paying the principal or original amount borrowed.
However, there are times when the lender hires another company to handle all the payment processing once the loan is booked—these companies are mortgage service companies.
A mortgage servicer is usually an outside company that helps with the processing of the loan, which can include making sure the loan is awarded to the borrower and that the borrower applies the loan to the intended purchase. Processing also includes tracking loan payments, sending reminder notices for missed payments, filing foreclosure documents in the event the loan is in default.
Default is when the payments haven't been paid for a length of time and are unlikely to be paid in the future. If a renegotiation of the terms of the loan can't be worked out, the home loan goes into foreclosure. Foreclosure is a process whereby the bank takes possession of the house and resells it to recoup any losses from the loan.
Mortgage lenders can also be the mortgage servicer. If the lender is set up to handle deposits, such as a bank or financing company, the company can also service the loan. A mortgage servicing company can come into play when a lender cannot hold deposits. Each state has its own laws and regulations as to how mortgage loans are serviced and the roles of banks and service companies.
If you want to know whether a mortgage servicing company is involved in your mortgage, the Consumer Financial Protection Bureau suggests checking the top of your statement or payment coupons for the return address of the company. If the address is not for the bank that originally gave you the loan, it's likely the loan is being processed by a service company. Also, visiting the MERS® Servicer Identification System website might be able to help identify the provider.
- A mortgage lender is a bank or financial company that lends money to borrowers to purchase a home.
- A mortgage servicer handles the payment processing and is the company that sends the monthly statements to the borrower.
- If your mortgage is sold, you'll have a new service provider, which should notify you of their address to send payments within 30 days.
Why Mortgage Service Companies Exist
Although some banks keep their loans that they originate, many other banks sell the mortgages to service companies. The service company takes over the loan process and handles all the payments. Selling a mortgage allows the banks to initiate new loans since banks have limitations as to how much they can lend, which can be based on a number of factors, including how much in deposits the bank is holding. Also, a bank might make more profit initiating new mortgages than servicing existing ones.
Mortgage loans are bought and sold through the secondary mortgage market—many of which are sold to Fannie Mae or the Federal National Mortgage Association (FNMA). Fannie Mae packages multiple existing mortgage loans as investments, which are called mortgage-backed securities (MBS). Individuals can invest in an MBS and earn a rate of return based on the mortgage interest rates in the investment.
If your mortgage is sold, you'll have a new service provider, which will notify you of their address to send payments. According to the Consumer Financial Protection Bureau or CFPB, the new lender or service company that bought your mortgage must "notify you within 30 days of the effective date of transfer. The notice will disclose the name, address, and telephone number of the new owner."