A loan servicer is the company that collects the borrower's payments, keeps the records, and handles the rules that come with a mortgage. It's not the owner of the loan. It works for the owner.
When I tell lenders the borrowers pay a licensed third-party servicer, not me, this is what I mean.
What a servicer does
- Collects payments and sends them to the note owner.
- Keeps the payment history, so there's a clean record of every dollar.
- Handles escrow for property taxes and insurance, if the loan has it.
- Sends the required notices and tax forms to borrowers.
- Works with late borrowers and follows the rules for collections and foreclosure.
Why it matters to a lender
- Clean records. A third party keeps the books, not the person who owes you money. You can trust the payment history.
- The rules get followed. Mortgage servicing has strict federal and state rules. Licensed servicers know them. Mistakes can delay a foreclosure or create legal trouble.
- It doesn't depend on one person. If something happened to the note investor, the servicer would keep collecting payments and keeping records.
Free lender guide: 5 questions to ask before you lend to anyone, plus a 12-item document checklist.
Licensed vs. self-servicing
Some note investors collect payments themselves. That can be cheaper. But it puts the money, the records, and the rules in one person's hands. Most states require a license to service mortgages for others. A licensed servicer is checked and regulated. Ask which one you're dealing with.
Questions to ask
- Who services the loans behind my money? Are they licensed?
- Can I see a payment history from the servicer, not a spreadsheet?
- How do I see where things stand each month?
- What happens to servicing if something happens to you?
See how lending with LJH works and what happens when a borrower stops paying.
Common questions
Is the loan servicer the same as the lender?
No. The servicer collects payments and keeps records for the owner of the loan. The owner can change without the servicer changing, and the other way around.
Do loan servicers need a license?
Most states require a license to service mortgage loans for others. You can look up a company in the NMLS Consumer Access database.
What does a servicer do when a borrower stops paying?
It sends the required notices, contacts the borrower, offers workout options the owner approves, and follows the rules if the loan moves toward foreclosure.
Written by Larry Hoffman
Managing Member of LJH Investments, LLC in Madison, Indiana. In real estate since 2006, with 300+ mortgage notes bought. Author of Mailbox Money Retirement.
General education, not legal, tax, or investment advice. Talk with your own attorney and tax adviser about your situation. All investing has risk, including loss of principal.