Mortgage companies and loan officers receive revenue from both the mortgage investor and the borrower when a mortgage closes. This revenue is often classified as commission. This income comes from two main sources. Yield spread premium (YSP) is provided to the mortgage company in exchange for marking up the interest rate above the par rate (wholesale interest rate on the loan). The origination fees are paid to the mortgage origination company as a commission for obtaining the loan for the borrower.
One point is equal to 1 percent of the loan amount. If your loan amount is $100,000, then one point is $1,000. If the loan amount is $350,000, then one point is $3,500. Mortgage companies love to work with higher loan amounts more than they do lower loan amounts because it means more commission. It may not take more work to close a $350,000 loan than a $100,000 loan, but the commission is higher, because they are both priced with one point.
Yield Spread Premium
Like most other products, mortgage loans have wholesale costs and retail costs. The wholesale cost is called par. This is when the interest rate provided does not pay the mortgage broker any money, but also does not cost the mortgage broker any money to obtain. Mortgage brokers typically raise the interest rate by 0.125 to 0.5 percent and receive points back from the lender as a commission. Again, the dollar amount of income received from the lender is more for higher loan amounts than it is for smaller loan amounts because the commission is paid in a percentage of the loan amount.
Often mortgage lenders sell the loans they originate to large mortgage investors such as Fannie Mae and Freddie Mac. These large investors only own mortgage loans. They do not service (receive payments or provide customer service) mortgage loans. In exchange for servicing the loans, mortgage lenders and banks receive a commission called a servicing premium.
Calculating Commissions and Other Fees
Mortgage lenders must provide borrowers with a good-faith-estimate (GFE) within three days after the borrowers sign the loan application. This document discloses all of the settlement fees required for obtaining and closing the mortgage. The GFE discloses the loan origination company's commissions on schedule A. Section B discloses other charges required for closing the loan. Some of these fees may actually be payable to the mortgage company originating your loan, but they must charge the invoiced fee. They cannot raise the price of the credit report and receive a commission from providing this required document.
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