How Mortgage Brokers Get Paid On Closed Home Loans

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How Mortgage Brokers Get Paid On Closed Home Loans

This BLOG On How Mortgage Brokers Get Paid On Closed Home Loans Was Written By Massimo Ressa of Gustan Cho Associates

Mortgage brokers, also known as loan originators and/or loan officers, are licensed professionals.

  • Mortgage Brokers assist mortgage loan borrowers qualify for home loans
  • Brokers are third party consultants who match direct lenders with borrowers
  • Brokers match borrowers with direct lenders that meets the lender’s mortgage guidelines
  • Mortgage brokers are not lenders
  • They are brokers who have wholesale relationships with lenders
  • Mortgage brokers can have relationships with one to over a dozen direct lenders
  • For mortgage brokers to be able to do business with a particular mortgage lender, the mortgage broker needs to meet the qualification requirements of the lender
  • Wholesale mortgage lender needs to approve the individual mortgage broker
  • Wholesale lenders will review the mortgage brokerage company’s following credentials:
    • years in business
    • type of business they do
    • volume of business they do
    • regulatory standings of the mortgage brokerage company

How mortgage brokers get paid? Mortgage brokerage companies get paid by wholesale mortgage lenders via yield spread premium or commission.

Yield Spread Premium Is How Mortgage Brokers Get Paid

Mortgage brokers do not get paid by borrowers.

  • How mortgage brokers get paid is by lenders after borrower’s home loan gets closed and funded
  • The commission of a mortgage broker, the yield spread premium, needs to be disclosed by law on the Good Faith Estimate and/or Loan Estimate
  • The Yield Spread Premium is part of the origination charges
  • This holds true even though the mortgage broker gets paid by the lender and not the consumer
  • Brokers is not allowed to accept any upfront fees from borrowers for their services
  • There is a lot of work in preparing, processing and underwriting a mortgage loan application
  • The mortgage brokerage company has overhead just like any other brokerage company
  • Secretaries, mortgage openers, and mortgage processors as well as the office expenses needs to be paid by the owner of the mortgage brokerage company
  • Unlike law firms or other professional consulting companies, brokers are not allowed to charge a retainer or upfront fees from consumers
  • Borrowers can cancel a loan application at any time prior to closing
  • Many hours of work can be performed by a mortgage broker
  • If borrowers cancels the application prior to funding and decides to go with a different company, the broker has just wasted all of his or her time
  • All costs of processing the loan cannot be charged to borrowers
  • However, if loan application gets a clear to close and gets funded, the brokerage company and the individual broker gets paid gets paid by the lender
  • This is how mortgage brokers get paid:
    • Once borrower loan closes and funded

Maximum On How Mortgage Brokers Get Paid

Prior to the 2008 Real Estate and Mortgage Meltdown and prior to the SAFE ACT and Dodd Frank Mortgage Laws, there was no maximum on how mortgage brokers get paid.

  • Some mortgage brokers charged 10% commission or yield spread premium and got away with it, especially on sub-prime loans
  • However, the whole lending industry went through a major overhaul
  • Mortgage brokers now need to take mandatory pre-licensing courses, take national and state exams, go through federal and state criminal background checks, and go through credit checks before they can get their mortgage loan originator’s license
  • There are also maximum fees borrowers can get charged
  • The maximum origination fee borrowers can get charged is no more than 3%
  • This includes processing and underwriting fees
  • Since borrowers normally get charged a $1,000 processing and underwriting fees, most brokers who want the maximum compensation can only charge 2.75% yield spread premium
  • The commission, yield spread premium, is paid for by the lender and not consumer

Yield Spread Premium Versus Mortgage Rates

Each mortgage brokerage company can decide how much their yield spread premium by lenders.

  • There are some mortgage brokerage companies that only charge 1.5% yield spread premium
  • That is the agreement they have with the direct lender
  • The higher the yield spread premium the broker has with the lender, the higher the mortgage rates will be for borrowers
  • Mortgage brokerage companies who want to offer the lowest possible mortgage rates for their borrowers have the lowest yield spread premium agreement with their lenders
  • Borrowers who need the services of mortgage brokers because they have multiple lenders chose brokers versus direct lenders
  • Brokers can go to to many lenders unlike mortgage bankers where they normally can only follow their mortgage banking company’s lending guidelines
  • Mortgage brokers, like other professionals, need to get paid
  • Most mortgage brokers who specialize in hard to do financing will charge the maximum 2.75% yield spread premium

Yield Spread Premium Agreements Between Mortgage Broker And Wholesale Lender

When a brokerage company enter into the compensation, or yield spread premium, agreement with lender, the broker decides on what yield spread premium compensation package they want. The lower the yield spread premium, the lower the mortgage rates. The higher the yield spread premium, the higher the mortgage rates for borrowers.  Due to anti-steering rules and regulations, once a broker set a yield spread compensation package with lenders, that agreement is in effect for a set amount of time. Brokers cannot flip flop with yield spread premium.

Everyone originating loans in that particular brokerage company needs to stick with that yield spread premium. For example, here is a case scenario:

  • if a company agreed on a 2.75% yield spread premium agreement with a lender
  • that mortgage rate is 4.75%
  • if they chose a yield spread premium compensation of 2.0% the rates for their borrowers would have been 4.0%
  • a mortgage broker cannot decide to choose the 2.0% yield spread premium for a particular client
  • this because he wants to give that client a better rate and cut his commission
  • Once the owner of the broker company decides on a particular commission rate he or she wants to stay on, that commission rate will stay until they decide to change the comp plan which they can do

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