Mortgage 101

Why was My Loan Sold and What Does It Mean?

By Courtney Christensen on July, 1 2020
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Courtney Christensen

Getting a letter or email from your mortgage company telling you that your loan has been sold can be shocking and concerning. You’ve just purchased a new house, why is your loan being sold and why so soon? What does it mean for you? 

The most important thing to remember is that loans are bought and sold all of the time. It’s very common in the mortgage industry and is part of how banks and mortgage lenders stay afloat.

Don’t panic when you get this notification from your lender! And, read on to learn about why loans are sold and what it means for you.

Some Definitions

Before we get into the details, it’s important to highlight some of the lingo used in the mortgage industry. There are three words you may run across in your new loan transfer information that often get confused and mixed-up. These are originator, lender, and servicer.

An originator is your loan officer. This is the person you worked with throughout the mortgage process. Your loan originator created the loan, sent it to underwriting to get approved, and guided you to the closing table. If you have any questions regarding your loan’s sale before, during, or after the loan process, make sure to ask your loan officer. They will be happy to answer your questions!

A lender is the organization that approves, funds, and “owns” your loan. Originally, the lender is the company that your loan originator works for. For instance, Ruoff Mortgage is a lender that employs loan originators. Ruoff Mortgage provides the funds for mortgages and approves the loan for those funds. Later, your lender may switch if your loan is sold to another company.

A loan servicer is the company that manages your loan. This is the company that you send your mortgage payments to, and who sends you monthly mortgage bills. Any communication about your loan will happen between you and your servicer. They also manage your escrow account in order to pay your taxes and insurance for you.  

Why are loans sold?

As I mentioned earlier, loans are sold often. This is due to a couple reasons, and is no cause for concern (even if it can come as a shock to first-time buyers or homeowners who haven’t ever had a loan sold before!).

Reason One: It reduces liability. Managing thousands of loans comes with risk. Risk comes from homeowners being unable to pay their monthly payments for any reason, bankruptcies, or foreclosures. All of these conditions translate to the mortgage lender losing money. Mortgage lenders can reduce some of this risk by selling many of those loans to other lenders. During this sale, the original lender sells the loan to another lender for a percentage of the loan as commission. This equals out the risk for both lenders.

Reason Two: It allows the lender to originate more loans. When you buy a home, you don’t typically pay for the whole thing in cash. A mortgage loan is involved – but someone has to pay for the house in full. That’s your lender’s job. When your loan was approved, your lender paid for your home out of pocket with the understanding that you will pay them back for it. Each loan approved is one more home the lender purchases. Eventually, money would run out entirely since mortgages are often paid off in 30 years. By selling loans, lenders are able to keep some of their money liquidated in order to pay salaries and buy more homes for their clients.  

What happens when my loan is sold?

Loans are usually sold early on in the life of the mortgage, often within the first few years. When your loan is sold, you will get notification before and after the sale. Your right as a homeowner is to know who is servicing your loan. For instance, when Ruoff Mortgage sells loans, we notify the homeowner prior to the sale so that they can be prepared for it.

Additionally, we provide phone numbers for our clients to call should they have questions or concerns about their new lender. We expect our clients to receive exceptional service whether we still service their loan or not. So, if our clients experience problems with their new lender, we want to help.

Once you receive notification that your loan has been sold, which must happen within 30 days of the sale, you shouldn’t notice much difference. Your interest rate, term, and fees will not change during the sale – so your monthly mortgage payment will remain the same. You’re just sending the check to another company.

Of course, there may be some differences. For instance, your new lender may allow online payments where your old one did not. They may have different payment options or more flexible plans.

What should you do once your loan is sold?

Upon receiving the notification of sale, take a look at the document sent to you. Whether it’s a letter or an email, it will list the dates of the transfer and where you should send your next mortgage payment. Sometimes, your mortgage payment may be due prior to or during the transfer in which case you can call your original lender to find out where you should send your next payment.

If you are currently paying online or through direct deposit, ensure that you can continue to do so with your new lender. This may take a phone call to provide new information with your new lender. It may also be a good idea to confirm that your new lender received your first payment a week or so after you’ve sent it. This will make sure that this and any future payment gets to where it should without any issues or late payment fees.

All in all, a loan sale is completely normal, common, and nothing to panic about! If you do have any questions or concerns about the process, give your loan officer or lender a call! They’d be happy to discuss it with you and calm your concerns.