Ever get tired of the administrative steps to support your Note? Is there a way to minimize communication with my borrower? What exactly are the reporting requirements for my state? Why has my borrower not paid and what can I do to restore the monthly payments? When I am gone, who in my family is ready to step in and manage my long-term Note? If you have ever considered any of these items, a Servicer may be the solution you need!
INTRODUCTION
In addition to collecting monthly payments from your Note, there are numerous maintenance items that must be completed to ensure the value of your investment. If you excel at completing recurring items and maintaining checklists, then a servicer might not be the right solution. However, for most of us, a servicer will be a great benefit. A servicer will complete all basic tasks and handle most communications with the borrower, including accepting monthly payments and sending on to you. Read on to learn more about what a servicer can do for you!
SERVICER ACTVITIES
In the Seller Finance area, a Third-Party Servicer will provide a connection between you and your borrower. They will collect borrower payments, handle accounting, send reminders, handle escrow for insurance and taxes, complete annual reporting and serve as a trusted source of knowledge for the duration of the loan. Servicers will handle all communication with the borrower, from the first payment to the last. You will rarely need to talk to your borrower.
Collecting Payments – Servicers have tools to collect payments monthly, to manage the money and most importantly periodic reminders to borrowers. They will contact borrower if a payment is late and will also assess late payment fees per the contract. Payments are electronically deposited into your bank account.
Accounting Activities– Servicers have the tools to break out payments into interest and principal reduction. The payments applied is divided into interest and principal reduction to show the updated unpaid balance (UPB). For annual reporting, Servicers will generate the necessary IRS-compliant reporting for both you (IRS FORM 1099) and your borrower (IRS FORM 1098).
Escrow management – Taxes and Insurance are two items that cause significant issues for Seller Financing. Servicers will follow up with borrower to ensure these items are paid on-time. If you are escrowing, then Servicer will work with the borrower and tax/insurance entities to ensure payments are made and will adjust the monthly payment amount as needed for annual increases. They also will follow state regulations on how to handle, hold, and report escrow funds.
Knowledge Source– Issues occur over the lifetime of a loan. When they occur, how much knowledge do you have to handle every type of issue? Servicers have extensive experience with missed payments, loan modifications up to foreclosure and can provide insight into how to steer through the many pitfalls of Note ownership.
Estate Management/Planning– Regardless of age or health, all note holders should take estate planning into consideration. Most Note owners hold the note in their name only with no co-owner listed. Who will handle the Note and borrower after you pass? Having a Servicer will allow you to pass on the benefit of owning a Seller Finance note without any hassle! Payments will continue to your beneficiaries with no interruption to your estate building wealth!
Cost – Each Servicer charges a little differently but generally you will have a set up charge ($100 to $150-one time fee) and a monthly fee for payment collection ($15 to $35-monthly). Sometimes, escrow is included but for some there are extra fees ($10 to $20-monthly) Some Servicers deduct their fees directly out of the borrower’s payments while others will have you pay direct monthly. TIP- When creating your new Note or when you are making a modification, add a clause in the mortgage that the borrower will pay all servicing fees!
INFORMATION REQUIRED
Getting a Servicer set up does require some effort on your part. Most required items are items that you should be maintaining or holding from closing. Please review the items below to understand what you will need to provide to a Servicer to initiate service.
Payment History– In the Note industry, proof of payments is the most important bit of information to understand how a Note is performing. Traditionally a bank statement, copies of checks or even receipt coupons will be needed. Some servicers will create a pay history affidavit for the borrower to review and approve.
Current Amortization – When payments are made, the payment is broken into interest, principal, late fees, escrow, and extra principle payment. Only principle items will reduce the loan balance, often referred to as the unpaid balance (UPB). The full loan amortization will show each payment and how they were identified. Even if you have not been maintaining it, you can create an amortization with a spreadsheet or accounting software.
Documentation – The key items required will be copies of the ownership deed, original mortgage/note, and original closing statements. In certain cases, any loan modifications or assignments will also be required.
Borrower Information – With current borrower information, the servicer will know how to get hold of the borrower. It is important that this information Is current and valid, so take a minute to confirmation all information is valid. The borrower ids (ex. driver license) and SSN/TIN numbers will be needed for the servicer records. These items are typically captured during the seller finance closing but if no copy is found you can obtain from the borrower. As a courtesy, let the borrower know that you will no longer be receiving payments and they should be sent directly to the servicer.
New Servicer Paperwork – All servicers have different paperwork requirements. Some still require hard copies while others have moved fully online. Normally, this paperwork will need to be submitted with the information listed above. A key item that you will need to provide is a bank account (routing and account number) where payments will be sent. Sometimes a voided check is requested. If there are multiple owners, payments can be split and sent to different bank accounts based on rules provided.
Onboarding Date – This is the date that responsibility for the loan will transition from current servicer or yourself to the new servicer. Most likely a “goodbye” letter will be prepared letting the borrower know to no longer send payments to the old location. In addition, a “hello” letter will be sent to the borrower introducing the new servicer to the borrower. The hello letter will clearly show where all payments should be sent or instruction for how to send payments electronically.
Online Access – Most servicers today have online access to your account for both you the loan owner and the borrower. We strongly recommend that you get this set up as soon as possible so you can monitor all activity on your loan. While systems vary, most will allow you to see a full amortization, borrower payments, payments to your bank and other borrower communication.
SUMMARY
Hiring a loan servicer is considered best practice for managing private notes. Servicers will complete the following tasks: Handle incoming and outgoing payments, monitor borrower compliance, contact borrowers about late payments, assist with issues, workouts, or payment problems, provide documents for tax reporting, and tracks payment activities and account balance.
Ownership has some wonderful financial benefits with little effort on your part. However, the interaction with your borrower is the most important part of long-term Note ownership. While you can be the primary contact with your borrower at a low cost, using a servicer can lighten your load and minimize the risk of Note ownership. The many benefits of using a third-party servicer far outweigh any cost savings from self-managing your Note!
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MEETING
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