Loan servicing for owner financing: what a servicing company does, and when you need one

You sold a property with owner financing and now someone has to collect the payments, keep the ledger and answer the buyer's questions for years. A loan servicing company will do that for a fee. Many sellers do it themselves. This page explains both, and what to ask before you hire anyone.

What a loan servicing company does for a seller-financed note

A third-party servicer stands between you and your buyer for the life of the note. Depending on the company and the plan, it will:

• collect the buyer's payments, often by automatic draft, and send your share on to you;
• apply each payment to late fees, interest, principal and escrow and keep the official ledger;
• hold escrow for property taxes and insurance and pay those bills when they come due;
• send the buyer monthly or annual statements, and the year-end interest forms in January;
• send late notices, and sometimes handle collections or a default;
• produce payoff statements when the buyer refinances or sells; and
• in some cases, report the buyer's payment history to the credit bureaus.

Pricing is usually a one-time setup fee plus a monthly fee per loan, with extra charges for escrow, payoff statements, late notices or default work. Over a twenty- or thirty-year note the monthly fee is the number that adds up, so compare the full fee schedule, not the setup price.

Questions to ask a servicing company before you sign

1. Are you licensed or registered to service loans in my state? Requirements vary by state; ask for the license number and check it with the state regulator.
2. Where is the buyer's money held between collection and payout? It should be a separate trust or custodial account, not the company's operating account.
3. How fast is my money sent to me, and how?
4. What is every fee, including setup, monthly, escrow, payoff, late notice, transfer and termination? Who pays each one, you or the buyer?
5. Do you report to the credit bureaus? Some servicers do and many do not. It matters to a buyer who plans to refinance.
6. Do you handle escrow, and how do you handle a shortage?
7. Who sends the year-end interest form, and to whom?
8. What happens when the buyer is late? Ask what notices go out and when, and what is extra.
9. Will you take over a note that has already been running? What history do you need from me?
10. If I leave, what do I get back? Ask for the full payment history in a usable format.

When a servicer is worth it

• The note has escrow for taxes and insurance and you do not want to hold the buyer's money.
• You want a neutral party between you and the buyer, especially a friend or relative.
• The buyer wants their payments reported to the credit bureaus to help a future refinance.
• You expect to sell the note, and a buyer of notes will want a servicer's history behind it.

When keeping the records yourself makes more sense

Plenty of note holders service their own notes, whether they hold one or a hundred. The buyer pays the holder directly by check or bank transfer, and the holder keeps the ledger. Without escrow, with reliable buyers, and with a per-loan servicing fee that would eat a real share of the interest on every note, it is often the better deal, and the savings grow with every note you add.

What goes wrong with self-servicing is rarely one month's arithmetic. It is the record drifting over years: a short payment applied one way in March and another way in October, a waived late fee that never got written down, a spreadsheet that went with an old computer. The record you keep has to be good enough to hand to a title company, a refinancing lender, a note buyer or a judge.

That record is what OwnerNote keeps. You log each payment as it arrives, and it applies every one the same way, keeps the balance current, produces payoff quotes good through any date, totals the year's interest, prints statements for any period, and can email your buyer a monthly statement on the 1st. It also covers most of the servicer's list above that does not involve holding money: late fees you charge or waive, an escrow ledger for taxes and insurance held in your own account, reminder and receipt emails to your buyer, payment coupon books, year-end interest statements in Form 1098's boxes, payoff letters, an insurance and property-tax watch, and a read-only view where your buyer checks their own balance. OwnerNote is not a servicer: it never collects, holds or disburses money, and payments keep going from your buyer to you. If you later move the note to a servicer, export the full payment history as a CSV and hand it over.

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Your duties stay yours

A servicer can do the paperwork, but the note is still yours, and so are the obligations that come with it, from state notices to tax reporting. If your note is on Texas property, see seller finance note servicing in Texas for the Texas rules. For how many seller-financed sales you can make before licensing rules apply, see RMLO licensing thresholds and the de minimis exemption.