A loan servicer collects the borrower’s payments, keeps the official record of the loan and passes the money to you. It also handles escrow, statements, year-end paperwork and the first response when a payment is late. You own the note and make the decisions, and the servicer runs it day to day.
A month on a paying note
- The payment arrives from the borrower by check, bank draft or online.
- The servicer splits it into principal, interest and any escrow, following the note’s terms.
- It updates the ledger, so there is one running record of the balance.
- It sends you the money, less its fee, with a statement showing what came in.
In between, it answers the borrower’s requests for a balance, a payoff figure or a copy of a statement.
Escrow, where it applies, means the servicer collects a monthly amount for property taxes and insurance and pays those bills when they fall due. Some private notes have no escrow. If yours is one of them, ask how the servicer will check that taxes and insurance are being paid, because a lapse in either one threatens your collateral.
Statements, letters and notices
A servicer also produces the documents that surround a loan: periodic statements to the borrower, payoff letters, annual interest statements, and the notices required when a loan changes hands. Which of these apply depends on the loan and the state. A company that sends them for a living has a routine for each one, where a first-time investor would be looking up the requirement from scratch.
When a payment is late
The servicer sees the missed payment before you do. It applies the late charge the note allows, contacts the borrower, records each attempt and reports to you. If the borrower can catch up, it sets up and tracks the plan you approve.
If the default deepens, the servicer sends the formal notices and passes the file to a foreclosure attorney on your instruction. From then on it will ask you to choose between the routes in what happens if the borrower stops paying, so ask early whether default work is charged separately from ordinary servicing.
What stays with you
The decisions are yours. Whether to modify, forbear, foreclose or sell is the owner’s call, and the servicer carries out the instruction. So is the risk: a servicer collects what is paid and pursues what is missed, and a default still lands on you.
The checking before purchase is yours as well. Title, property value and paperwork are the due diligence steps in the investor guide, done before closing and before a servicer is involved. The original documents are a separate matter again. Servicing runs on copies and the payment record, so decide where the collateral file will be held, with you or with a document custodian, and ask whether the servicer offers custody if you want everything in one place.
Why pay someone to collect one payment a month
On a single note, collecting the payment yourself looks simple, and some holders do it. The case for a servicer starts with resale. A ledger kept by a third party is a payment record a later buyer can rely on in a way they cannot rely on your own spreadsheet, and the strength of that record feeds into the price you are offered.
Regulation is the second part. Collecting on consumer loans is governed by rules that vary by state and may require a license, which is covered in whether you need a license to buy notes. The last is distance: a borrower with a problem calls the servicer’s office and not your cell phone.
Boarding the loan
Moving a loan to a servicer is called boarding. You send the note terms, the current balance, the payment history and the borrower’s details. The servicer sets up the account, and the borrower is told in writing where to send payments from a given date. A handover is when a payment is most likely to go to the old address, so read the first statements closely and make sure the starting balance matches what you bought.
Choose the servicer before you bid, including on a note from our buyer list, so the loan can be boarded as soon as you close.
What to ask a servicer before you sign
Start with these, and use note servicing for investors when you come to compare companies and read their reports.
- Do you service loans in the state where this property sits, and are you licensed there if a license is needed?
- Will you take a single private note, or is there a minimum?
- What is the monthly fee, the setup fee and the charge for default work?
- When and how do you send me the money and the statement?
- Can I see the ledger and the borrower contact notes online?
Fee schedules are built differently from one company to the next, so compare the whole schedule and not only the monthly charge. Ask for it in writing before you send the loan file.
Related questions
Who pays the servicing fee, the investor or the borrower?
The servicing agreement sets it. Where the investor pays, the fee is taken out of each payment before the rest is sent on. Some charges, such as late fees, are paid by the borrower if the note allows them. Ask for the full fee schedule before you sign.
Can I change servicers after I buy a note?
Generally yes. The note is yours and you can move it, subject to the servicing agreement you signed and to any notice the borrower must be given. Expect a transfer fee and plan the timing so no payment is lost in the handover.
Does a servicer keep the original note?
Only if you arrange it. Servicing runs on copies and the payment record, so the original documents stay with you or with a document custodian unless the servicer offers custody and you ask for it.