How are mortgage brokers compensated?

Let’s begin by attempting to explain the role or function of a mortgage broker within the framework of a lending transaction. Mortgage brokers serve as the link between the borrower and the lender. Their activities typically involve assisting the borrower in completing a loan application, ordering required reports such as credit history and property appraisal, verifying certain data through loan processing, assisting in the loan closing and perhaps, most importantly, educating and advising their clients about the mortgage industry and mortgage opportunities.

For their part in facilitating the lending transaction, the mortgage broker receives compensation. Total compensation to the mortgage broker generally comes in the form of commissions (generally reflected as a percentage of the loan amount) and/or other fees oftentimes labeled “processing fees”, “application fees”, “administration fees” and “document preparation fees”. The method of compensation can vary from transaction to transaction and in any specific transaction a broker’s compensation may be paid by the borrower as “points”, by the lender as a “rebate”, or a combination of the two.

While mortgage broker compensation is usually not governed by law, the government has nevertheless had to intervene due to exorbitant compensation charged by some mortgage brokers for services rendered. The two most obvious interventions on the part of the government in this regard are: (1) the Truth in Lending Act (TILA) enacted in 1968, and (2) the Real Estate Settlement Procedures Act (RESPA) enacted in 1974. In essence, these Acts provide borrowers with the ability to make better credit decisions through the proper disclosure of facts, terms and rates.

Again, since compensation is not governed by law, a mortgage broker can effectively charge you whatever he/she wants. While these Acts do not change that, they do mandate that the mortgage broker make it very, very clear what the borrower is receiving. This should allow the borrower to compare offerings from one broker to the next...

Often, a mortgage broker needs to be nudged by the borrower to provide the borrower with the information to which they are entitled. The following are a few questions you should ask a mortgage broker:

1.) Will you provide me a Good Faith Estimate of Closing Costs?

This will provide you with a very detailed breakdown of all costs related to the loan transaction such as appraisal fees, credit report fees, processing fees, underwriting fees, document fees, escrow fees, title insurance fees, notary fees, etc.

2.) Can you show me your wholesale rate sheet?

Be prepared for a wide variety of answers, from “They would not make any sense to you.” to “It is illegal to provide you with these. They are for our use only.” The bottom line is that, with a little explanation and guidance, rate sheets are relatively easy to read and there are no restrictions as to their use.

3.) How will you be compensated?

Once again, be prepared for a wide variety of answers, but what you should expect is something like this….. “Regardless of the loan program you select, fixed or adjustable, whether it is a two-point, one-point, no-point or no-point/no-fee loan, our fee will be 1%. Let me show you how it works.” At this point, the broker should refer to the wholesale rate sheet and explain what the borrower would have to pay at any rate on the sheet. A brief illustration of this would look like this:

EXAMPLE ONLY

*At these rates, the broker would have to pay the lender, hence, if a borrower wanted a rate of 5.750%, the borrower would pay a total of 1.500% of the loan amount, .500% of which would be paid to the lender and the broker would retain the 1.000% as their fee.

If you are able to get understandable responses to the above questions, you will then have the ability to properly compare offers between brokers. Preferred Financial brokers will be happy to provide you with all of the above and, if you wish, we will help you analyze any offers you might receive.

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