In the great housing and lending boom before the 2008 recession, dozens of investors backed mortgage loans that were made through non-traditional means. These are known as a type of investment called securities, because either way, the investors were secure in the knowledge that they would get their money back. Unfortunately for thousands of homeowners, that put them in a precarious position because they could not refinance in the usual way. Their mortgages were, and are, handled by service providers, rather than mortgage lenders. Here is more about the differences between these two home financing sources and why it matters.

Loan Servicers

Loan servicers are debt collectors. They are not lenders, banks, or credit agencies. They handle business transactions between the investors that backed your loan so that you could buy your home (with your purchased home as collateral in the event that you default).

If you need to refinance your home or rescue it from foreclosure, you typically cannot do it through the loan servicer as they are not a financial institution. In most cases, the servicer does not even have branch locations or places where you can walk in and make your monthly mortgage payment. Additionally, rates with a servicer may be extremely high because you were unable to initially get a mortgage from a traditional lender, and the servicer is returning the elevated interest as profit to the investors that backed your loan.

Mortgage Lenders

Mortgage lenders includes all traditional lenders of mortgages, including banks and credit unions. These are the typical sources of funding to which most people turn when they want to buy a house. Your credit has to be in reasonably good standing and you have to show adequate income to purchase the house.

Mortgages with these lenders are much more flexible in terms of refinancing, adjusting the terms of the mortgage, payments and repayment schedules, and locations where you can make your payments. If you can get a mortgage through a traditional mortgage lender, everything else after that is a lot less complicated and easier to manage than it would be had you gone through a loan servicer.

Why It Matters

There are many changes that occur in life. Lose your job or get a divorce and you could lose your house too. A bank or credit union can help you keep the house, while a loan servicer is less forgiving and/or may be more difficult to work with. You can always refinance with a mortgage lender, but you cannot with a loan servicer. Your mortgage rate could continue to climb up to the government maximum allowed under a loan servicer, but your rate is only adjustable under a mortgage lender if that is the type of loan you chose.