Monthly advances by servicer: Overview, definition, and example
What are monthly advances by servicer?
Monthly advances by servicer refer to the regular payments made by a servicer (typically a financial institution or a third-party service provider) on behalf of the borrower to cover certain costs associated with a loan or mortgage. These advances are typically made to ensure that obligations such as interest payments, insurance premiums, or property taxes are paid on time, even if the borrower is unable to make the payments themselves for a specific period. The servicer then collects these advances from the borrower later, often as part of the loan repayment.
For example, in a mortgage agreement, the servicer might advance the monthly property tax payment to the relevant authority, and the borrower will reimburse the servicer as part of their next mortgage payment.
Why are monthly advances by servicer important?
Monthly advances by servicer are important because they help ensure that the borrower’s financial obligations are met consistently and on time, which can prevent late fees, penalties, or default. These advances also help maintain the integrity of the loan, as they ensure that required payments, such as taxes or insurance premiums, are not overlooked. For servicers, offering monthly advances helps build trust with borrowers and ensures the loan remains in good standing.
For borrowers, these advances provide a safety net by ensuring that payments are made on their behalf, even if they temporarily miss a payment. However, it is important for borrowers to understand that they will need to repay these advances at a later time.
Understanding monthly advances by servicer through an example
Imagine a homeowner with a mortgage loan who is unable to make their property tax payment due to a temporary financial setback. The servicer of the mortgage loan steps in and makes the property tax payment to the local tax authority. This ensures that the tax obligation is met, preventing penalties or liens against the property. The servicer then includes this amount as part of the homeowner’s next mortgage payment, adding it to the principal and interest owed.
In another example, a borrower with a mortgage might miss a payment for homeowner’s insurance. The servicer advances the insurance payment to ensure the homeowner's policy remains in force. The servicer will later recoup this payment as part of the next monthly mortgage payment from the borrower.
Example of monthly advances by servicer clause
Here’s how a monthly advances by servicer clause might look in a loan agreement:
“The Servicer shall advance any payments due for property taxes, insurance premiums, or other escrowed obligations on behalf of the Borrower. Such advances will be added to the Borrower’s account and repaid through subsequent monthly payments, along with interest if applicable.”
Conclusion
Monthly advances by servicer are regular payments made by the servicer to cover costs like insurance, taxes, or other obligations when the borrower is temporarily unable to pay them. These advances help maintain the loan in good standing and prevent disruptions in payments, while ensuring that necessary obligations are fulfilled. For servicers, it provides a service to the borrower, while for borrowers, it ensures that their obligations are met even during financial difficulties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.