Yield Spread Premium
Yield Spread Premium Explained:
Mortgage brokers are licensed mortgage loan originators who have relationships with multiple wholesale mortgage lenders and can help mortgage loan applicants who have special needs. For example, if a bank cannot help you get a mortgage due to their mortgage lender overlays, a mortgage broker can possibly help you because mortgage brokers have outlets to wholesale mortgage lenders that may cater to your needs. Mortgage brokers get paid via yield spread premiums which are another word for commissions.
Mortgage Brokers Versus Mortgage Bankers
Mortgage brokers do not use their own funds to fund mortgage loans. They are the middleman between a mortgage loan borrower and a lender. A mortgage banker uses their own funds to fund mortgage loans. Mortgage bankers normally cater to their own products and have their own set of mortgage lending guidelines. For example, to get qualified for a FHA loan with a 3.5% down payment, FHA only requires that the mortgage loan applicant have a 580 FICO credit score. However, a particular mortgage banker may have their own rules that are more strict than the minimum federal HUD mortgage lending guidelines and may implement a minimum credit score of 640 FICO and refuse to look at any mortgage loan applicant with credit scores under 640 FICO. This is when a mortgage broker can help you. Mortgage brokers will have access to various lenders who can do mortgage loans for borrowers under 640 FICO credit scores as well as borrowers with bad credit, high debt to income ratios, and other credit issues. In lieu of their services, mortgage brokers get paid through the yield spread premiums, also known as YSP. The yield spread premiums is basically the mortgage broker’s commission.
Basics Of Yield Spread Premium
Yield Spread Premiums to a mortgage broker is paid for by the mortgage lender. A mortgage loan applicant is not responsible in paying the mortgage broker their commission. However, due to new federal disclosure laws, all yield spread premiums needs to be disclosed to all mortgage loan applicants on the fees worksheet and Good Faith Estimate. The yield spread premium will be listed and a credit will be listed so it zeroes it out. The mortgage applicant is charged the yield spread premiums but then the mortgage lender will credit the mortgage applicant the yield spread premiums so there are no charges for the mortgage loan applicant.
Maximum Mortgage Broker Commission
The maximum amount a mortgage broker can charge a mortgage loan borrower is no more than 3% which includes fees and costs along with the yield spread premiums which was effective earlier this year. Most mortgage brokers cap their yield spread premiums at 2.5% so they have 0.50% to work with in the event if there are other costs and fees such as underwriting fees, processing fees, or credit report fees. For example, if a mortgage loan borrower gets a $100,000 mortgage and on the fees worksheet and GFE, Good Faith Estimate, it states the yield spread premiums at 2.5% or $2,500, that cost is the commission that the mortgage broker makes. Normally, the yield spread premiums is split between the owner of the mortgage brokerage and the mortgage loan originator.
Mortgage Brokers And Yield Spread Premium
Every mortgage broker needs to enter into an agreement with every wholesale lender they want to do business with. When they enter into the business agreement, the mortgage broker and wholesale mortgage lender sign a yield spread premium agreement where they agree on a commission structure. Again, the maximum a mortgage broker can charge is 3% by law which includes not just the yield spread premiums but also any costs and fees with the origination of the mortgage loan. A mortgage broker can enter into a commission agreement anywhere between 0.50% to 2.99%. The higher commission structure the mortgage broker chooses, the higher the mortgage rates will be to the mortgage loan borrower. The yield spread premiums is paid to the mortgage broker from the mortgage lender above par pricing. The higher the yield spread premiums, the higher the rate. In the event if the mortgage broker wants to give the client the best rate at par pricing, then it needs to be borrower paid because a mortgage lender will not give a commission to the mortgage broker at par pricing.
Yield Spread Premium Plus Lenders Credit Towards Borrower’s Closing Costs
Mortgage brokers get paid via yield spread premiums by mortgage lenders. The higher the yield spread premiums, the higher the mortgage rate for the mortgage loan borrower. A mortgage broker can increase the yield spread premiums above his comp plan and give the excess to the mortgage loan borrower so the mortgage loan borrower has extra cash to cover the closing costs associated with the mortgage loan. For example, say par pricing for a $100,000 FHA loan is 4.00%. Let’s also say that the mortgage broker has a comp plan with the mortgage lender where the mortgage lender will compensate the mortgage broker 2.5% for all lender paid mortgage loans originated by the mortgage broker. On this example, the mortgage broker might have to charge the mortgage borrower 4.25% in order for him to get the 2.5% yield spread premium. The mortgage broker can charge the mortgage borrower 4.5% and get a total yield spread premiums of 4.0% but the maximum the mortgage broker can make is 2.5%. The excess 1.5% in credit will go towards the mortgage loan borrower to cover the closing costs. This excess is called a lenders credit towards a buyers closing costs.
There are cases where a mortgage loan borrower wants the lowest rate possible and is willing to pay points. In situations like these, the mortgage broker can give the mortgage loan borrower par pricing. Lets use the above case scenario. Par pricing on the above scenario was 4.0%. The mortgage lender will not give the mortgage broker any lender comp at this rate. This case scenario is called borrower paid comp where the mortgage loan borrower pays the mortgage broker the 2.5% .
Mortgage Banker And Mortgage Broker
A mortgage banker can also broker mortgage loans. For example, I am a mortgage banker and use our own funds to fund mortgage loans. However, our investors have overlays and will not accept any mortgage applications under a 620 FICO credit scores. So on mortgage loan borrowers who have credit scores under 620 FICO, I have relationships with wholesale mortgage lenders who will cater to my specialty mortgage loan applicants. Mortgage bankers do not disclose yield spread premiums because they use their own funds. Mortgage brokers do. On banking transactions, there is no mortgage yield spread premium I need to disclose. However, on mortgage transactions that I broker, I will need to disclose the yield spread premiums on the HUD Settlement Statement.
Related> Fact sheet: Yield spread premiums