In order to understand how Mortgage Brokers get paid, first one should know WHY Mortgage Brokers get paid. Mortgage Brokers are intermediaries that work with lenders to obtain financing for borrowers who wish to purchase residential or commercial real estate. The reason an individual or organization would obtain the services of a Mortgage Broker would be to secure financing at the lowest rate that the market will offer at that particular time for the type of property they wish to purchase.Brokers are sometimes paid by both the lenders who underwrite the mortgages and the consumers who get them, and it's important to look at the documents to make sure the broker isn't getting paid too much or double-charging you.
Just like a bank loan officer, a broker gets paid for performing all of the work necessary to originate, process, and close a loan, and for the expertise they provide in matching the client and their needs to the right lender and program. These days there are hundreds of lenders with thousands of loan programs. Many customers ask us why they should use a broker, rather than going directly to a bank, and the reasons are simple.
* First, a bank loan officer represents the bank, not you. Their job is to originate loans for the bank, and only for the bank employing them. A broker represents you. While they work with banks, you are their customer, and they will represent you when interacting with any and all of their bank relationships.
* Second, since the loan officer represents only one bank, they can offer you only the products of that bank, whereas a broker generally represents anywhere from 10 to several hundreds lenders. The broker has far more options to find the best product and the best price for your specific needs, and if for some reason they do not have the ideal fit, they can work with hundreds of additional lenders to find the perfect fit.
* Third, you may believe that a bank will offer you better rates. Well, that is rarely the case. The bank's treasury department has a required rate of return (yield) on the loan, called the 'wholesale rate'. The bank's retail loan officer must provide the bank with the required yield, and then they must generate enough additional revenue to pay the loan officer, plus the high operating costs necessary to run a retail bank loan division and its many layers of management and support. A broker will have access to that same wholesale rate, but the additional revenue they must generate to cover salaries and operating costs is far less, since brokers do not have the large infrastructures that the bank has. The law requires that brokers disclose the fees they earn, while banks are not required to do so. Brokers originate 50-60% of the mortgage loans in the US because they provide the best service at the best price - when was the last time a bank provided you with both?
* Finally, brokers only get paid if they close the loan. Having someone represent you is always beeter for you when their income is tied to thier success in serving you, the customer.
Mortgage Brokers get paid to provide borrowers with financing to purchase or refinance homes. Most Mortgage Brokers only get paid when they close your loan. Mortgage Brokers are usually paid at closing from the borrower or out of loan proceeds. Mortgage Broker fees are usually capped by each state to prevent them from taking advantage of borrowers. Mortgage Brokers fees can be found on the Good Faith Estimate which are required by law to be shown to borrower within 3 days of applying for a home loan.
A combination of payments by origination fee paid by the borrower and a premium paid to the broker by the bank does not necessarily denote excess charging. In many cases that is the proper way to price a loan in order to structure the loan's rate and fees to provide the most benefit to the borrower's situation.
If you use a mortgage broker, you usually pay a fee for services or you pay additional money to your lender (sometimes the extra money is tacked on as an additional point on the mortgage) and then the lender pays the mortgage broker
In many instances Mortgage Brokers are paid by both the borrower and the Lender. This ensures that the borrower receives a favorable rate, while the Mortgage Broker is able to receive adequate compensation. The best method of payment will depend on your individual situation.
So why wouldn’t a borrower go directly to a bank for mortgage financing? The reason is because a Mortgage Broker is able to obtain the same financing at Wholesale Interest Rates, while a consumer will only be able to obtain financing at Retail Interest Rates. As is the case in any industry, Wholesale is always less expensive than retail. For this service, Mortgage Brokers are paid a fee, either directly from the borrower for obtaining favorable rates, by the Lender for obtaining a client that they otherwise would not have obtained, or a combination of the two.
One way a Mortgage Broker can obtain their fee is through charging a fee called an Origination Fee. This fee is paid to the Mortgage Broker for Originating the Loan. The Origination fee is added to the other closing costs that must be paid by the borrower. These fees can be paid out of pocket by the borrower, or in the case of a refinance, or 100% financing loan, the fees can be rolled into the loan. The amount of the Origination fee that is charged is generally a percentage of the loan amount. The amount of the fee is based on the difficulty level of the loan. For this reason a subprime loan will generally carry a higher Origination fee than a conforming loan.
Another reason Mortgage Brokers are paid for their services is because very often, they are able to obtain financing for individuals that would not have been offered by any traditional bank. Borrowers who have poor credit, little to no money for a down payment, an unusual property type, or a multitude of other issues will always find it easier to obtain financing through a Mortgage Broker.
Mortgage Brokers can also be paid by the Lender that actually makes the loan. The Lender compensates the broker for bringing clients to obtain loans. This fee is referred to as “Yield Spread Premium”, and the amount generally depends on the interest rate at which the loan is made to the borrower. The higher the interest rate with respect to current market conditions, the higher the Yield Spread Premium paid to the Mortgage Broker. This method of payment is utilized by many brokers because it reduces the out of pocket fees to the borrower while still allowing the broker to obtain compensation for their services.
Although everyone enjoys getting a "good deal", it is prudent to be suspicious of a mortgage broker who charges significantly less than the norm. A good mortgage broker is a trained, experienced professional who must be properly compensated for his/her services.
Look at it this way. Would you feel good about being operated on by a doctor who works for way less money than other doctors? As in just about everything else in life, paying too little often means a drop off in the quality of the goods or the service.
The bottom line is the mortgage broker gets paid for a tremendous amount of work having to coordinate the lender (closing coordinator & funder), title company (closer & assistant), Appraiser & Insurance company. In most cases this is an arduous task to get each of these people to work in synergy. This demands a great deal of time and effort.
In addition mortgage brokers find the best lender for your situation and every lender has different guidelines to follow for underwriting conditions. This is a fluid industry and guidelines for lenders change on a constant basis. This makes the tasks of a mortgage broker more challenging.
