Mortgage brokers are compensated in one of three ways. A mortgage broker can be compensated by the lender in the form of yield spread premium, by the borrower or a combination of compensation from the lender and compensation from the borrower. In this article I will discuss each way a mortgage broker can be compensated.
Mortgage brokers are compensated by the borrower in the form of a mortgage broker fee. A mortgage broker fee is a percentage of the loan amount a mortgage broker will charge the borrower for arranging the mortgage loan. As in any service industry, mortgage broker fees will vary depending on how difficult the mortgage broker perceives the mortgage financing to be. As a mortgage broker in New York, my standard fee for a mortgage loan for a borrower who wishes to compensate me directly is normally 1% of the loan amount I am arranging.
Mortgage brokers can also be compensated in the form of Yield Spread Premium. Yield Spread Premium has often incorrectly been referred to as a legal kickback between the wholesale mortgage lender and the mortgage broker. However, yield spread premium is actually the difference or spread between retail mortgage rates and the wholesale mortgage rates the mortgage broker receives from the wholesale mortgage lender. For example, when I have a client who does not want to pay a mortgage broker fee I will not charge a mortgage broker fee but rather be compensated by the lender in the form of the interest rate that I will obtain. Many times it will make more financial sense my clients not to pay a mortgage brokerage fee but rather take a slightly higher interest rate.
Lastly, a mortgage broker can be compensated partially from the wholesale mortgage lender and partially from the borrower. For example, depending on the needs of the borrower, he or she may choose to pay a reduced mortgage brokerage fee and take a slightly increased interest rate so that the mortgage broker can be compensated. However, as a New York mortgage broker I am rarely compensated in this manner. I have found it to be most beneficial to my clients to either pay a mortgage brokerage fee or take a slightly increased interest rate so that I may be compensated.
As in other service related industry, if you would like to utilize the services of a mortgage broker be advised that the mortgage broker needs to be compensated for the services he or she will be providing to you. Much like an accountant, financial advisor, mechanic or any other service provider is compensated for the services they provide to you. When utilizing the services of a mortgage broker be sure that your mortgage broker reviews all of your options and the exact manner in which he or she will be compensated for their services.