What Is Yield Spread Premium Charged By Mortgage Brokers

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What Is Yield Spread Premium Charged By Mortgage Brokers

This BLOG On What Is Yield Spread Premium Charged By Mortgage Brokers Was UPDATED On April 30th, 2018

Yield Spread Premium Explained:

Mortgage brokers are licensed mortgage loan originators who have relationships with multiple wholesale mortgage lenders. Mortgage Brokers are not lenders. They are middleman between borrowers and actual lenders. They can help mortgage loan applicants who have special needs.

  • For  example, if a bank cannot help borrowers get a mortgage due to their mortgage lender overlays, a mortgage broker can possibly help
  • This is because mortgage brokers have outlets to mortgage lenders that may cater to borrowers needs
  • Mortgage brokers get paid a commission for their services
  • The commission they make is called yield spread premiums which are another word for commissions
  • Mortgage lenders pay mortgage brokers a commission and not borrowers

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
  • Mortgage bankers 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 credit score
  • However, a particular mortgage banker may have their own rules that are more strict than the minimum federal HUD mortgage lending guidelines
  • They may implement a minimum credit score of 640 and refuse to look at any borrowers with credit scores under 640
  • This is when a mortgage broker can help borrowers
  • Mortgage brokers will have access to various lenders
  • Home Buyers do not have to contact one lender after another lender
  • Mortgage Brokers may have outlets to specialty lenders who specialize in the following types of loans:
    • mortgage loans under 640 FICO credit scores
    • borrowers with bad credit
    • high debt to income ratios
    • other credit issues
  • In lieu of their services, mortgage brokers get paid  commission
  • The commission the lender pays the mortgage broker is called yield spread premiums, also known as YSP
  • The yield spread premiums is basically the mortgage broker’s commission for matching the borrower and mortgage lender

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 Loan Estimate
  • The yield spread premium will be listed and a credit will be listed so it zeroes it out
  • Borrowers 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
  • Mortgage Lenders will charge a higher mortgage rate in order to be able to pay the mortgage broker

Maximum Mortgage Broker Commission

The maximum amount a mortgage broker can charge a mortgage loan borrower is no more than 3%. This includes fees and costs along with the yield spread premiums.

  • Most mortgage brokers cap their yield spread premiums at 2.5%
  • This way 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, here is a case scenario:
    • Borrowers gets a $100,000 mortgage
    • On the fees worksheet and Loan 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
  • The mortgage broker can lower the yield spread premium to get borrowers lower mortgage rates

Mortgage Brokers And Yield Spread Premium

Every mortgage broker needs to enter into an agreement with a lender they want to do business with.

  • When they enter into the business agreement, the mortgage broker and 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
  • This 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 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 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 borrower
  • This is done so borrowers 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 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 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 borrowers par pricing
  • Lets use the above case scenario
  • Par pricing on the above scenario was 4.0%
  • The lender will not give the mortgage broker any lender comp at this rate
  • This case scenario is called borrower paid comp where borrower pays the mortgage broker the 2.5%

Mortgage Banker And Mortgage Broker

A mortgage banker can also broker mortgage loans.

  • For example, mortgage bankers use their own funds to fund mortgage loans
  • However, investors have overlays and may not accept borrowers under a 620 credit scores
  • So borrowers who have credit scores under 620 may need to be brokered out to mortgage lenders with no overlays
  • Mortgage bankers do not disclose yield spread premiums
  • This is because they use their own funds
  • Mortgage brokers do need to disclose yield spread premiums because they are not lenders but middleman
  • On banking transactions, there is no mortgage yield spread premium to disclose
  • However, on mortgage transactions that loan officer broker, they will need to disclose the yield spread premiums on the HUD Settlement Statement

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