Brokers get paid through the Loan Origination Fee on the Good Faith Estimate which will range between 1% - 2% (some brokers charge more). They'll also charge a Processing Fee which ranges between $450 - $650 to pay their processor/loan coordinator. Some brokers might additionally charge an Administration Fee or a Transaction Coordinator fee which could range between an additional $450 - $650. Now you may or may not agree with this particular fee but the fact is, it is assessed to cover the overhead expense in keeping the business open. You might ask, isn't that what the origination fee is for? Well, yes and no. Unless you're the broker, you have to split the profits from the origination fee and you don't get a cent from the Processing or Admin. Fees.
Do you pay a higher interest rate for using a broker? Not necessarily. The fact is, whether you use a broker or a banker, the rate you pay might be higher and it might be less. It's ultimately up to the loan originator writing up your loan file. On one day a broker might charge you a lower rate while the next day a banker charges you the lower rate. It ultimately depends on the individual.
Does the financial institution give him a fee or a kick back (the broker)? For the sake of argument, let's say the par rate you're quoted today is 6%. A broker would offer you 6% at par which means all you're paying is the loan origination fee of 1.25% (I'm simply using 1.25 as an example here). As a Broker, I can sell you a higher rate, say 6.25 or 6.375% and the lending institution financing the money will pay me a rebate (also known as Yield Spread Premium) of an additional .75%+-. So in essence, by selling you the higher rate, I'd get paid 1.25% Origination Fee that I'm charging you but the bank would also pay me .75%+- for a total of 2% commission. The bank doesn't pay me the rebate out of the loan proceeds (such as the cash-out). But you are assessed a higher rate on your loan. *A note here: this Yield Spread Premium (YSP, or a.k.a. rebate) is disclosed on the Good Faith Estimate when working with a broker. When you work with a bank, they're not legally required to disclose YSP. This is why I say that you may or may not pay a higher rate with a broker than you would with a bank. You may very pay a higher rate with a bank and think you're getting a 6.25% at par when really the loan originator is getting a rebate.
I hope that answers some of your questions and understanding of the process. I can fax or email you a sample GFE if you'd like and we can review the costs associated to give you a guideline.
I also have a weblog at http://www.industry-report.com Here, I'll write some posts detailing some of this discussion that I hope serves you as a resource. You might want to reference the Category section titled "Home Buying 101" for some recent articles on the mortgage application process.
All the Best!
1 - Through origination fees charged at closing.
2 - From the lender through the yield spread premium .
First of all an explanation. The yield spread is the compensation that the lenders pay the mortgage banker or broker to bring them the loan. When we price loans we have several different options. Every day the wholesale lenders we deal with send us (the mortgage banker or broker) new price sheets. These sheets have matrices which allow us to price the loan in different ways. You can get a lower rate by paying points (1% of the loan amount) upfront to bring the rate down. Or you can get a loan with no points and no origination fee at a higher rate. The higher the interest rate, the higher the yield spread premium. This sounds like a recipe for price gouging, but in most cases competition keeps prices in line. This also allows consumers to reduce the cash they need to close.
Whether a banker, a broker or a direct lender is best depends on your specific circumstances and what is happening in the market. Each party is in this to make money.
The advantage of a mortgage broker is that they deal with a number of wholesale lenders and can shop your scenario around and place the loan with the lender who is offering the best rate. Lenders generally offer lower rates at wholesale because dealing with brokers is often a cheaper way of brining in business than setting up their own retail shops. So brokers sometimes have lower rates through a wholesale lender than the lender is offering through their own retail channels.
Direct lenders tend to go in and out of the market. If they are looking for more volume they will lower their rates, when they have what they need the rates go up and they are no longer competitive.
It pays to shop around when you are getting a loan. Ask for a good faith estimate so you know not only the rate but the fees that will be charged. Ask the lender if he will guarrantee this estimate. Also, ask the lender how they are getting paid.
But choosing who to deal with is more than just about the rate. How experienced is the loan officer? What kind of reputation does the company have? Do you feel comfortable with the loan officer and trust that he will follow through? Do they communicate well and get back to you when you have a question or problem?
Rates are important, but with all the changes in the mortgage industry, knowing that you will get through the closing smoothly is crucial.
They can shop a ton of lenders for you, and have access to programs you may never find by flipping through the phone book or surfing the net. Brokers can have a lot of advantages over bankers, You might pay a little more in fees up front, but they may save you a lot of money in the long run. If you have any issues that may effect your ability to finance, A broker will be a great advantage!