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November 11, 2022

How a Mortgage Broker’s Commission Impacts Interest Rates

In today’s episode I talk about how a mortgage broker receives compensation for taking a loan application and closing the loan. Many things affect the interest on a home loan and loan officer compensation is one of them just like real estate agent compensation impacts a home sale price. This goes for any type of loan whether it’s a purchase or refinance loan.

How Points (BPS) Affect a Mortgage Loan

I wrote a recent blog post on how the Cost of Credit impacts interest rates. In that episode I touched on Basis Points. 100 bps = 1 point, and 1 point equals 1%. Regulation Z (a federal mortgage law) stipulates how a loan officer can get paid, and how broker compensation (origination fee) may split between everyone who worked on processing the loan. Typical compensation to a brokerage equals about 2.75 points, also known as 275 basis points, or 2.75% of the total loan amount.

**Note, loans must remain active longer than 7 months for the broker to retain compensation because of a rule that mandates an origination refund if the loan is paid off in 6 months. If the loan is paid off early, then the broker and all associated parties must pay back the loan origination fee.

Pricing a VA Home Loan

Loan pricing is the process of determining an interest rate. Banks and lenders offer the interest rate based on basis point compensation. In the VA example below, the par interest rate is 5.875%. A normal origination fee at 2.75 points equates to a 7.125% interest rate. That’s a $442 difference in the monthly payment. These numbers come into play with rate buydowns and lender credits. Some brokers have to follow the ⅛ percent price jumps and some brokers have a relationship with their lender so that they can get exact pricing down to the thousandth of a point. (.001) Due to “Yield Spread” lending laws in this VA example, a 2.75 broker compensation plan would give the borrower 0.020 points back. Based on a $500,000 loan, 0.02% equals $100 cash back to the borrower.

How Yield Spread Relates to Mortgage Loans

To protect consumers from unscrupulous lenders, the federal government instituted a yield spread law that mandates any compensation that exceeds the lender’s determined compensation rate must be returned to the borrower. This rule was established because unscrupulous lenders could, and have, incentivized loan officers into upselling clients into higher interest rates and loan costs, among other things, without the consumer truly understanding what is going on. In the mortgage world, we call this overcompensated pricing ‘Yield Spread.” This rule falls under the Real Estate Settlement Procedures Act, aka: RESPA. This law was created to protect against predatory lending.

UWM VA Pricing
VA Loan Pricing Example in November 2022

Understand Various Mortgage Options When Buying a Home

So when a loan officer prices out a loan, he or she will look at what percentage rates line up with their compensation. From there, they typically offer the borrower options to either “Buy Down” the rate, take the interest rate as is, or accept a higher rate that results in credits which the borrower may use towards things like Closing Costs. Borrowers should speak with their mortgage broker to truly understand what scenarios may benefit them the most. Stay tuned for an episode on the benefits of buying down or taking lender credits.

There are many different aspects that impact the Cost of Credit and if you missed out on the previous episode summarizing what Cost of Credit is, check out that blog post. Remember that whatever your situation, there is a Juicy Solution waiting for you. Check out the many blog posts and resources around the website, or give me a call so I can put you in touch with my team in Colorado who is great at guiding borrowers through their best finance options.

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