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 or both parties.
One way mortgage brokers get paid is via a yield spread premium (YSP), which is the commission the bank or mortgage lender provides in exchange for a given mortgage rate above market.
Mortgage Brokers Paid More for Higher Rate
For simplicity sake, the higher the rate or margin, the more YSP the broker will receive.
YSP may also be referred to as “par-plus pricing”, “rate participation fee”, “service release fee”, and many other variations, so keep an eye out for it on your documents.
If a borrower chooses to avoid out-of-pocket expenses, the broker may boost the interest rate above the par rate to make money on the back-end via YSP so he or she can cover your closing costs and still make money.
Mortgage brokers have the ability to make several points on the back-end of a loan, earning thousands sometimes without the borrower’s knowledge.
They can also collect money on the front-end of a loan via out-of-pocket closing costs like loan origination fees and processing costs.
A broker may charge you one mortgage point upfront for origination, meaning they’ll be paid one percent of the loan amount for getting you the loan, while also tacking on loan processing fees.
The smaller the loan amount, the more points you’ll likely be charged, as the point won’t be as meaningful.
At the same time, brokers may take some YSP on the back as well, so you need to be careful and inquire about all fees at the onset of the loan and at closing.
Trickier Mortgages Cost More
Generally, the more complicated or tricky your loan is, the higher the broker costs will be, as it takes more time 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 probably be charged more.
If the loan can be closed with any given bank or broker, you’ll likely 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 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
Other possible admin/junk fees
If you’re unsure about which route to go, check out my article on mortgage brokers vs. banks .
Update: As of April 1, 2011, yield spread premiums are banned. Now mortgage brokers can only get paid by either the borrower or the lender, not both.
This should reduce the amount of money they can charge, though it will probably vary on a per-loan basis.
So continue to be vigilant and look over your loan documents to ensure you aren’t being overcharged.