A note servicing company collects the payments on a loan for the person who owns it. It takes the money from the payer, keeps the official record of what was paid and what is owed, passes the funds to the note holder, and handles the paperwork in between.
The day-to-day work
| Task | What it involves |
|---|---|
| Collecting payments | Receives the payer’s check or bank transfer each month and sends the money on to your account. |
| Keeping the ledger | Records the date and amount of every payment and splits it between interest and principal. |
| Tracking the balance | Knows the exact amount owed on any day and can issue a payoff statement. |
| Escrow, if set up | Collects extra each month for property taxes and insurance and pays those bills when due. |
| Late payments | Sends reminders and notices and applies late fees the note allows. |
| Year-end statements | Prepares the annual interest figures both sides need for their tax returns. |
The range of services differs between companies. One may stop at collecting and recording, while another also monitors taxes and insurance or manages the early stages of a default. The servicing agreement spells out which you are getting, so read it before you sign.
Where the servicer’s job ends
A servicer stands between you and your payer and runs the administration. Everything else stays with you. You own the note and every payment on it; the servicer holds the money briefly and forwards it. If the payer does not pay, there is nothing to forward, because a servicer makes no promise that payments will arrive.
Decisions stay with you as well. The servicer will tell you a payment was missed and may send notices, but whether to work something out with the payer or start foreclosure is your call, made with an attorney. The rate, the payment and the term are fixed by the note, and a servicer has no power to alter them.
What it costs
Ask each company for its fee schedule in writing. The items to look for are a setup fee, a monthly fee per loan, and separate charges for extras such as payoff statements or escrow handling. Who pays is a matter of agreement: the note holder, the payer, or both in shares. Prices differ from one company to the next, which is the reason to compare more than one. Investors choosing a servicer for notes they plan to buy have more to weigh, and note servicing for investors is written for them.
Whether you need one
We know of no rule that says every private note holder must use a servicer, and you are free to collect payments yourself. Legal requirements can apply in some situations and they differ by state, so check with an attorney if you are unsure. Setting the law aside, a servicer earns its fee in these ways:
- You get an independent payment record that nobody can say you wrote yourself.
- You do not have to chase a late payer in person, which matters if the payer is a neighbor or a relative.
- Tax statements and payoff figures are prepared for you.
- If you die or become ill, the payments keep being collected and recorded.
Against that, the fee is a monthly cost on a note that may be small. If your payer pays on time by bank transfer and your own records are clean, you may decide the fee buys you little.
Servicing records when you sell the note
A buyer of your note is paying for the future payments, and the best evidence that those will arrive is proof that past ones did. A servicer’s ledger is the strongest form of that proof. Bank statements showing matching deposits also work. A handwritten list with nothing to back it up is the weakest, and weak proof makes a buyer less sure, which shows up as a lower offer.
The buyer arranges servicing after the purchase, which settles whether you need a loan servicer to sell your note: you can sell without one. Whichever record you have, a servicer’s ledger or your own bank statements, it is the first thing to gather before you ask us to price the note.
If you collect the payments yourself
Deposit each payment on its own and keep the statements. A buyer who asks you to prove payment history on a note will want to match deposits to due dates, and a deposit that mixes the note payment with other money is harder to read. Beside the statements, keep a simple ledger with the headings a servicer would use: date, amount, interest, principal and balance. Each of those is defined in the note basics guide if you are setting one up for the first time.
Related questions
Can I service my own note?
You can, and we know of no general rule against it. Keep a dated record of every payment and deposit each one so it shows on a bank statement. Legal requirements can apply in some cases and vary by state, so ask an attorney if you are unsure.
Does the servicer keep the original note?
Some servicers offer document storage and some do not. Whoever stores it, the note still belongs to you. Ask for a written receipt listing the documents held.
What happens to servicing when I sell my note?
The buyer decides who services the note after the sale. Your payer receives written notice of where to send payments, and the loan terms stay the same.