How Much Does a Mortgage Broker Typically Make Off of a 350K Mortgage?
This question is not easy to answer because there is no set or regulated standard for arranging mortgage broker compensation. Mortgage brokers can technically charge whatever they want to, but of course with the significant amount of competition that exists today they are more likely to charge less.
Broker Compensation is Variable
Mortgage brokers are compensated in a variety of ways, and from a variety of sources. First, the borrower will usually pay the broker with cash or loan proceeds (thereby increasing the amount of the loan by the broker’s fees). Additionally, brokers will often charge points for their services, which are added to the settlement sheet and paid by the borrower at closing.
Points Paid to Broker
A point is equal to 1% of the total loan amount, and different brokers will charge different amounts of points, usually based on the complexity of your loan. It is very important to note that these points charged by brokers for their services are different from points paid directly to the lender in exchange for a lower interest rate (called Discount Points).
Because the broker can anticipate commission from multiple sources, these points are very often an easy target for borrower negotiation since they do not effect the interest rate on the loan.
Yield Spread
The second source of compensation to brokers is the lending institution. All lenders will pay mortgage brokers for delivering loans to them. The most notable method of computing broker commission is the lender’s rebate, which is referred to in the industry as the Yield Spread. This term refers to the difference between the lowest interest rate on a loan that a particular lender will accept, and the actual interest rate that the broker convinced the borrower to take. Obviously a larger interest rate will result in a higher Yield Spread, hence a larger commission for the broker. The lender typically uses their own proprietary calculation to determine how much to compensate the brokers for the Yield Spread, and this compensation is translated into a points calculation.
The broker will receive a certain percentage of the loan as commission based on how much higher the borrower’s interest rate is compared to the lender’s minimum requirement.
These are not the only two methods by which mortgage brokers are compensated, however they are the most significant to potential borrowers.
Brokers Must Disclose Compensation
Several other compensation techniques exist that have no effect on the outcome of the loan or the completion of the application, so we will not delve into those details at this point. What is extremely important to note, however, is that all mortgage brokers are required by law to disclose any and all forms of compensation that they plan to, or anticipate that they will, receive. There are multiple reasons for this disclosure requirement, primarily to protect the borrower from predatory or unethical lending practices. All borrowers who are considering retaining the services of a broker should insist that such information be provided prior to entering into any formal agreements.
