Lender Versus Borrower Paid

How Mortgage Brokers Get Paid on Closed Home Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers how mortgage brokers get paid on closed home loans. Mortgage brokers, loan originators, or loan officers are licensed professionals. Mortgage Brokers assist mortgage loan borrowers to qualify for home loans. Brokers are third-party consultants who match direct lenders with borrowers,

Mortgage brokers match borrowers with direct lenders that meet 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, they mortgage broker need to meet the qualification requirements of the lender. A wholesale mortgage lender needs to approve the individual mortgage broker. The following paragraphs will discuss how mortgage brokers get paid on closed loans.

Wholesale Lenders

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Wholesale lenders will review the mortgage brokerage company’s years in business, the type of business they do, the volume of business, and the 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 by lenders after the borrower’s home loan gets closed and funded is by wholesale lenders. The commission of a mortgage broker, the yield spread premium, must be disclosed by law on the Good Faith Estimate 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 cannot 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. The owner of the mortgage brokerage company must pay secretaries, mortgage openers, mortgage processors, and office expenses. How mortgage brokers get paid is through yield spread premium from wholesale lenders on each deal.

Can Mortgage Brokers Charge Upfront Fees?

Unlike law firms or professional consulting companies, brokers cannot charge consumers a retainer or upfront fee. Borrowers can cancel a loan application at any time before closing. A mortgage broker can perform many hours of work. If borrowers cancel the application before funding and decide 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 the loan application gets clear to close and funded, the brokerage company and the individual broker get paid by the lender. This is how mortgage brokers get paid once the borrower’s loan closes and is funded.

Maximum On How Mortgage Brokers Get Paid
Maximum On How Mortgage Brokers Get Paid
Before the 2008 Real Estate and Mortgage Meltdown and before the SAFE ACT and Dodd-Frank Mortgage Laws, there was no maximum on how mortgage brokers get paid. Some mortgage brokers charged a 10% commission or yield spread premium and got away with it, especially on subprime 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 getting their mortgage loan originator’s license. There are also maximum fees borrowers can get charged.

The maximum origination fee borrowers can charge is no more than 3%. This includes processing and underwriting fees. Since borrowers normally get charged a $1,000 processing and underwriting fee, most brokers who want the maximum compensation can only charge a 2.75% yield spread premium. The commission, yield spread premium, is paid for by the lender and not the consumer.

Yield Spread Premium Versus Mortgage Rates

Each mortgage brokerage company can decide how much their yield spread premium by lenders. Some mortgage brokerage companies only charge a 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 their borrowers the lowest possible mortgage rates have the lowest yield spread premium agreement with their lenders. Borrowers who need the services of mortgage brokers because they have multiple lenders choose brokers versus direct lenders.

Unlike mortgage bankers, brokers can go to many lenders, who normally can only follow their mortgage banking company’s lending guidelines. Mortgage brokers, like other professionals, need to get paid. Most mortgage brokers specializing in hard-to-do financing will charge the maximum 2.75% yield spread premium.

Yield Spread Premium Agreements Between Mortgage Broker And Wholesale Lenders

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When a brokerage company enters into the compensation or yield spread premium agreement with the 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 sets a yield spread compensation package with lenders, that agreement is in effect for a set amount of time. Brokers cannot flip-flop with a yield spread premium.

How Does Yield Spread Premium Compensation For Mortgage Brokers Work

Everyone originating loans in that particular brokerage company must stick with that yield spread premium. For example, here is a case scenario.  Suppose 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 because he wants to give that client a better rate and cut his commission. Once the owner of the broker company decides on a special 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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  1. Hi Massimo! Quick question for you. In a rate environment like we’re in now, how would YSP work if the interest rate to a client is let’s say 2.75% for a 30 year fixed loan? I’m a LO that does roughly 8 million in production monthly and currently receiving 160bps from a top 20 lender. I’ve been considering opening a brokerage for a while now, but would like to better understand how compensation would work with wholesale lending partners to see if it would be more lucrative and justify the jump to a brokerage. Any information you can provide would greatly be appreciated.

    Thanks so much.

    S. G.

  2. I want to get a mortgage loan, but I’m not sure how to ensure that I do it right. It makes sense that working with a broker would be really important. I am a Navy physician and real estate investor. I am interested in a mortgage with low down payment, as we are in the middle of adopting a child and will need cash upon our match. That said I have W2 income ~250k, and rental income of 50k/year. I am having trouble with loans given the number of investment homes I have and my dti being right around 53%. I am converting my current residence into a short term beach rental, but obviously do not have that income yet on my W2.

    Please let me know if you think we can work together.
    Thank you,

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