How Do Mortgage Investors Affect Your Loan?
You might be wondering what mortgage investors have to do with you when you buy a home. The truth is, mortgage investors keep the real estate market running in ways you probably didn’t even realize – and in some cases, they can impact the servicing of your current mortgage.
Most mortgage lenders opt to sell your home loan at some point during your mortgage term, so you’ll want to understand how this process works. We’ll explain more about mortgage investors, how home loans transfer and what this means for you.
What Is A Mortgage Investor?
After you buy a home, there are two main parties you’ll need to be aware of – your mortgage lender and your servicer.
Your mortgage lender is the bank or other financial institution that issued your mortgage. Your servicer is the entity that handles your home loan payments after closing. Sometimes these entities are the same, but other times, your lender will direct you to a third-party company that handles loan servicing for them.
A mortgage investor is the party that purchases mortgages from lenders. In most cases, these investors are actually government entities or government-sponsored enterprises that purchase your home loan so your lender is able to continue selling new home loans.
For instance, if your lender maxed out all of their funds this year on 30-year fixed-rate home loans – mortgages that would be paid off over 30 years – that would mean all of their investments would be tied up or on hold for three decades. In order to keep issuing new home loans, they sell mortgages to mortgage investors.
The sale of your loan doesn’t impact the collection of payments, so when your loan is sold, you shouldn’t notice a difference from a practical standpoint. You’ll keep making your payments to your servicer, which may or may not be your original lender.
There are two main types of mortgage investors that might pick up your home loan – government-sponsored entities and government agencies. We’ll explain the difference below.
Some mortgage investors, like Fannie Mae and Freddie Mac, are government-sponsored entities.
Fannie Mae and Freddie Mac have their own selection of conventional home loan products. Conventional home loans are mortgages that are backed by a private financial institution or investor instead of the government. The interest rates are similar to and sometimes lower than loans backed by government entities. There’s also a lot of flexibility in these products to match up with unique financial goals.
When either of these two entities purchase mortgages, they sell them to private investors as mortgage-backed securities. As you continue to pay on your home loan, Fannie Mae and Freddie Mac use this money to pay back the investors who purchased their securities.
When private mortgage investors invest with Fannie Mae or Freddie Mac, they are not guaranteed a profit. Mortgage-backed securities often consist of as many as 1,000 loans or more. Still, if enough people don’t make their payments, the return on investment can be substantially lowered.
There are also government agencies that purchase mortgages that meet their investor guidelines. These agencies include the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA) and the United States Department of Veteran Affairs (VA).
These agencies can all purchase home loans from lenders that meet their individual agency guidelines and resell them on the secondary market to private investors. This allows these agencies to receive instant funds from investors on your loan, which in turn lets them continue to purchase more mortgages.
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Why Was My Loan Sold?
Most people don’t realize that the secondary home loan market plays a huge role in keeping the mortgage industry thriving. This secondary market purchases mortgages and makes money as you pay off your home.
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.
When lenders sell loans, they’re able to take this debt from their balance sheet and free up their credit for new customers.
The second reason your home might be sold is to provide the lender with instant funds. Your lender might earn tens of thousands to hundreds of thousands of dollars off of your home loan in interest, but they’ll need to wait 15 or 30 years – or the length of your mortgage – to receive their funds. Sometimes lenders prefer to make a faster profit by selling off your mortgage to an investor.
You can find out if your mortgage can be sold by consulting your loan paperwork. Your lending agreement or mortgage contract will detail in fine print whether your home loan has the option of being sold to another investor.
Will My Loan Change?
The details of your loan – your mortgage rate, terms and other agreements – will not change if your home loan is sold by your current lender. Those details are locked into your contract and will remain the same as they did on the day you closed on your home.
What you need to look out for are potential changes in your loan servicer.
When lenders sell your home loan to institutions like Fannie Mae, Freddie Mac or the three main government agencies, they sometimes retain servicing rights. This means they’ll still handle all the home loan servicing.
As a customer, this means you’ll still deal with the same lender you financed your home through. Your service won’t be interrupted and you likely won’t even notice any differences. Your lender will send you a letter if your home loan changes investors, with all of the specific information regarding this transaction, and will note that your servicing will remain the same.
Not all banks and lenders are able to keep home loan servicing after a loan has been transferred, however. If this is the case, your servicing will transfer to another lender. When your loan is sold, you'll be notified of this change with a transfer notice within 30 days of the loan sale. When you receive this notice, your lender will let you know if your servicing was transferred and will provide details with your new contact information.
It’s important to make sure you always open mail and emails from your lender so you don’t miss any information regarding service changes.
What To Expect If Your Servicing Transfers
Finding out you have a new loan servicer after your mortgage has been sold is completely normal – many lenders sell mortgages.
The transfer notice will provide the information you need to get a hold of your new lender. From there, you may need to set up a new online account, direct deposit schedule and account profile on a new online servicing system. Be sure to act on this quickly so there are no delays that could cause your home loan payments to go through past the due date.
If there are delays that cause your mortgage payment to be missed, don’t panic. Reach out to both providers to explain the issue. For instance, if you were notified on the 29th of a change in service and your next mortgage payment was already scheduled to go through on the 30th with the old provider, you might not be able to set up a new payment in just 24 hours.
Be sure to talk to your original lender to ensure your last payment went through and that you have clear expectations of when you should stop paying them. Then reach out to the new lender with this information, particularly if you missed a payment because you scheduled it with the old provider. If you accidentally make a payment to your old servicer within 60 days of the transfer of servicing, they aren’t legally allowed to consider it a late payment.
Communication is key during this process, so make sure you’re covered and communicating with both providers.
Lenders sell mortgages on the secondary market all the time. If your lender sells your home loan, there’s no need to worry. In most cases, your loan servicing remains the same and you’ll continue making payments just as you did before.
If your servicing does change, your original lender will notify you and your new servicer will send you instructions on how to set up a new account, so there is no disruption in payment. Be sure to reach out to the new and old providers with any questions so you understand what to expect during this transition.
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