Loan Servicing Agreement Is Standard

Added September 19, 2006 by Ilyce R. Glink

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Summary: A reader was wondering if he had to sign the loan servicing agreement as part of the mortgage closing process. Ilyce explains that the agreement describes what happens if the loan is sold and is a standard part of all mortgage deals.

Q: How important is the loan servicing agreement? What happens if the buyer doesn't sign it?

A: The servicing agreement you're referring to is part of a package of disclosures that a lender gives to a buyer for his or her signature at a closing. This document tells a buyer that it is likely that the loan will be sold to an investor or another lender on the secondary mortgage market. It also describes the process that the lender will take in notifying the buyer of the transfer of the servicing rights to the loan.

When you buy a house and get financing, the lender may end up selling the loan to another bank or investor, or, in some cases, may sell the rights to service the loan (that is, to collect your monthly payments) to a company that specializes in loan servicing.

As an owner, you'll want to know how to contact the lender that is servicing your loan and need to know where to send the monthly mortgage payments. Signing the disclosure means you understand that it is likely that your loan will be sold and that you understand how you'll be notified of this change.

What I don't understand is why you'd object to signing the servicing agreement form. In some cases, the lender may refuse to give you the loan if you fail to sign the disclosures and documents that they request at the closing.

Unless the document is somehow out of the norm or the document changes the economic terms of the loan, there shouldn't be any reason not to sign it.

In some cases, some lenders have inserted documents into a loan package that are out of the norm for a closing, such as a requirement for you to obtain mortgage credit insurance as a condition for closing on the loan. If you get a document like that, you can refuse to sign it. But a loan servicing agreement is fairly standard and I'd sign it.

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