Wednesday, September 15, 2010

How Much Does a Mortgage Broker REALLY Get Paid?

Here's how mortgage brokers get paid.

We can make money in two ways. The first is by charging the borrower directly for fees. This is known as front-end compensation. The second way we get paid is by receiving a payment from the lender. This is known as back-end compensation.

Here are some examples of front-end compensation (direct charges to the borrower):
  • Origination fee
  • Discount fee
  • Underwriting fee
  • Processing fee
  • Admin fee
  • Marketing fee
  • Warehouse fee
  • Any other fee we decide to charge

On the Good Faith Estimate (GFE), all of these fees except the discount fee will be combined into Our Origination Charge (line 1 on the second page of the GFE). The discount fee will be on line 2. Always ask your mortgage broker for a breakdown of these fees. If he won't tell you, dump the bum and find someone who will be honest with you.

Does the broker get to keep all of these fees? No, they don't. However, there is absolutely no way for a borrower to know which fees the broker is paying to someone else and which fees he is keeping for himself.

Here is how back-end compensation works:

  • If the mortgage broker is acting as a true broker (meaning he is arranging for the financing, but does not actually fund the loan with his company's money), then he gets a check from the lender for increasng the interest rate. The more he increases the interest rate, the more money he gets. This is known as a Yield Spread Premium, or YSP. This is supposed to be reported on the Good Faith Estimate (GFE), but people still cheat in the mortgage industry, so it may or may not be on the GFE.

  • If the mortgage broker is acting as a mortgage banker (meaning he is not only arranging for the financing, but also funding the loan with his company's money), then he gets an additional check from the lender. This is known as a Servicing Released Premium, or SRP. This does not have to be reported on the GFE, so the borrower will never know if the broker is getting this check.

Every loan works this way, regardless of whether the person selling the loan works for a retail bank or sells loans for more than one bank.

2 comments:

Otto said...

Does the broker get paid immediately on closing or does the loan have to be kept for a certain time? I ask because I got a loan and then rates went down & I got an offer to refinance immediately. My original broker did a lot of work & I wonder if I refinance 3 months after placing the loan does it affect him at all?

Chris and Debbie Thomas said...

Otto,
The broker gets paid immediately. However, if the loan is paid off within a certain period of time, then the broker may have to give part or all of the money back to the lender. The length of time before this doesn't happen depends on the lender. The longest is usually 6 months.
Check with your broker if you are concerned about him losing his money.
Chris