Mortgage Q&A: “How does a mortgage broker get paid?”
If you happen to use a mortgage broker to obtain your mortgage, you may be wondering how they get paid.
Mortgage brokers essentially work as middlemen between borrowers and banks/lenders, so they can be paid by either parties.
In the past, mortgage brokers got paid via yield spread premium (YSP), which was the commission the bank or mortgage lender provided in exchange for a given mortgage rate above market.
Mortgage Brokers Were Paid More for a Higher Rate
For simplicity sake, the higher the rate, the more YSP the broker would receive.
YSP was also referred to as “par-plus pricing”, “rate participation fee”, “service release fee”, and many other variations.
Mortgage brokers had the ability to make several points on the back-end of a loan, earning thousands of dollars, sometimes without the borrower’s knowledge.
They could also collect money on the front-end of a loan via out-of-pocket closing costs like loan origination fees and processing costs.
For example, a broker was able to charge one mortgage point upfront for origination, meaning one percent of the loan amount, while also tacking on loan processing fees.
The smaller the loan amount, the more points you’d likely be charged, as a point wouldn’t be as meaningful.
Trickier Mortgages Tend to Cost More
Generally, the more complicated or tricky your loan is, the higher the broker costs will be, as it takes more time and energy to close.
So if your loan isn’t plain vanilla, and requires a lot of tinkering and paperwork/legwork to make it work, you’ll likely be charged more, or offered less attractive pricing.
If the loan can be closed with any given bank or broker, you’ll probably be able to shop around to get a better deal.
Of course, there are always exceptions to the rule, and borrowers have certainly paid through the nose for perfectly simple loans.
Make sure you’re clear on what exactly is being charged by the broker for their role in the loan process or you may get a nasty surprise.
Retail loan officers (those that work directly for one specific bank) also get paid in a similar fashion and could potentially overcharge you, but their commissions don’t need to be disclosed like YSP, so you’ll never know how much they made on your loan.
This has led to an ongoing debate about the fairness of wholesale vs. retail lending, although it can actually be advantageous for a borrower to use a broker, as all fees must be disclosed.
In summary, mortgage brokers can make money from:
Loan origination fees
Yield spread premium (this practice is now banned)
Other possible admin/junk fees
If you’re unsure about which route to go, check out my article on mortgage brokers vs. banks.
How It Works Today
As of April 1, 2011, the yield spread premiums described above were effectively banned. Today, mortgage brokers can only get paid by either the borrower or the lender, not both.
In other words, they charge you directly to close the loan or they get paid by the lender and you pay for that commission indirectly (not out-of-pocket at closing) via a higher interest rate.
It’s similar to YSP, but brokers must choose a compensation plan upfront with all the lenders they work with, as opposed to charging different amounts on each loan as they see fit.
For example, they may choose to earn 1% on every loan they close with Bank A. So if the loan amount is $500,000, they’d earn $5,000. If it’s $300,000, they only get $3,000. And so on.
But they may select a higher compensation structure with Bank B that gives them 2% on each closed loan. This essentially allows them to send their loans to higher-paying banks depending on their ability to sell the customer on a potentially higher rate.
So you can still get a raw deal. Perhaps more importantly, it means they can no longer get paid on both the front- and back-end of the loan.
However, you should continue to be vigilant and look over your loan documents to ensure you aren’t being overcharged.
Put simply, you’ll want them to send your loan to the bank that offers you the lowest interest rate, not the one that gives them the highest commission.