What is Loan Servicing?

Borrowers pay principal and interest to mortgage banks or subservicing companies for providing loan servicing. The details of the actual loan servicing is greatly dependant upon the terms negotiated between the borrower and the servicing firm at the time the loan was approved.

What is Involved in Loan Servicing?

From the time a loan is approved interest and principles are paid to the firm that services it.  Administrative duties involved in loan servicing include collecting monthly payments from the borrower as well as sending off monthly payment statements.

Loan servicing requires the administrator to perform the ongoing tasks of collecting, paying, tracking and monitoring funds. This includes collecting paying property taxes as needed as well as making insurance payments and managing escrow funds. 

How are Loan Servicing Companies Paid?

Loan servicing firms normally get a small percentage of each periodic loan payment. This is typically referred to as the servicing strip or servicing fee. The fee normally ranges from 0.25 percent to 0.5 percent. 

Loans trade in the secondary market meaning that loans are sold to and managed by other like investment companies. It is very similar to mortgage-backed securities. Loan servicing is part of the lending process. A number of servicing firms take care of collecting and dispersing funds  for the borrower.

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