How Does A Mortgage Broker Get Paid? How Much?

I'm creating this post to see who wants to weigh in on a heated debate.  How is a Mortgage Broker paid?  Its a slippery slope that almost always goes from "How" to "How much".  So, to start things off, let's start with the nuts and bolts.  There are two things to remember.  Brokers can be paid by the Lender (the back), and brokers can be paid by the borrower (the front).  Sometimes brokers are paid by one or the other, sometimes by both.  But for the sake of this post, lets assume there are no Seller Paid Closing Costs (look for that post next week)

When Mortgage Brokers are paid by the lender (known as the "back end" of the transaction), it is in the form of Yield Spread Premium (YSP).  YSP is a commission that is paid to the broker by the lender for completing a mortgage loan with their company.  The amount of this commission is ultimately determined by the market.  Yes, there is an opportunity for "front end" closing costs to be paid in exchange for a higher rate, but this doesn't mean that those closing costs disappear.  It just means that the broker will pay those expenses out of their YSP in the form of a broker credit.

When a Mortgage Broker is paid by the borrower it is referred to as the "front end" of the transaction.  More times than not, a borrower would usually see a Loan Origination Fee and Processing Fee.  Depending on the type, documentation, and risk of the loan, a borrower may be charged additional fees.  These fees can be listed as Loan Origination, Processing, Credit Report, Broker Fee, Administration Fee, etc.

Now . . .How MUCH should a mortgage broker be paid?  This is where people usually start grandstanding.  Typically, closing costs can cost anywhere from 3% -6% of the loan amount.  Closing Costs are defined as a sum of ALL costs involved with the transaction.  To include:

• Lender Fees
• Broker Fees
• Appraisal Fees
• Title Fees
• State and Local Taxes
• Prepaid Items/Reserves
• Inspection Costs
• Homeowners Insurance
• Title Insurance
• And maybe more

The mortgage broker is just a piece of this amount.  My point is that there are several entities that are involved in the transaction.  All are hired to protect the interests of the borrower or the lender.  How much of that goes to the broker, depends on a variety of factors, many of which are beyond the control of the broker.  But mainly determined by the amount of work, time, and expertise that is necessary to complete the loan.  Just as an auto mechanic would charge for labor, or an attorney bills for hours.  A mortgage broker is entitled to charge whatever they feel their services are worth.  He/She may be priced too high or priced too low, just like any other services.

I hear this all the time, "a Loan is a loan, so why would a broker charge different borrowers a different amount?"  Well, to put it simply, no two loans are the same.  Some can be closed in a matter of hours with little or no documentation.  But, some can be closed over 45-60 days and require numerous forms and types of redundant documentation.  Or some don't close at all  (who should the broker bill in that event?)  So to say their all the same is a huge misconception.  The argument I always hear is "its just as easy to close a $50,000.00 loan as it is a $350,000.00."  That may be true through nothing but coincidence, certainly not a general rule.  The things that determine the difficulties and challenges of a loan seldom have anything to do with the loan amount.  It has everything to do with:

• The borrowers credit history
• Will the borrower be living in this home?
• Will there be a down payment?
• Is the borrower self employed?
• Is the property a single family residence?
• Are there repairs that need to be made?
• Is there anything unique about the property?
• And most definitely 100 other factors.

As with any profession, you get what you pay for.  Many brokers offer an array of services in order to build a lifelong lending relationships.  Others charge a minimum and extend no service other than shuffling paper work.  I don't speak for every broker, and certainly not the bad apples.  But there are a huge majority of mortgage brokers that pride themselves on their accomplishments and "can-do" attitudes.  A true mortgage professional sees the value in repeat business and a client for life.  A slow down or a flat market will weed the others out.

Always committed to making clients for life, your Missouri Mortgage Broker

Comments

[Robert]

Mortgage brokers have many sources when it comes to how they earn from a certain mortgage. Somtimes they can base it according to mortgage rates:

http://www.whataboutloans.com/mortgage/mortgage-rates.html

Nevertheless, clients must only get the best kind so everything will be worth it.