There is one distinct difference between mortgage brokers and mortgage lenders – mortgage brokers have to disclose how much money they are making on the mortgage they get for you but mortgage lenders do not.
Let me repeat this – mortgage lenders to not have to disclose how much money they are making on your loan while mortgage brokers have to disclose what they are making.
All of this has to do with the Yield Spread Premium. Mortgage brokers have to show you the Yield Spread Premium (YSP) and mortgage lenders do not.
Typically, the first place that you will see YSP being disclosed is on the Good Faith Estimate that your loan officer gives you after your loan pre qualification and credit interview. More on Good Faith Estimates and YSP.
Yield Spread Premium Is The Difference Between Brokers and Lenders
In fact, mortgage bankers, banks, credit unions, and mortgage lenders do not have to show the YSP that they are making on the loans that they arrange for their customers. Yet, all of these companies make money the same way that mortgage brokers do – they either charge Points or they get a YSP or they do both.
For mortgage bankers, lenders, credit unions, bankers their YSP is called a Service Release Premium or SRP. The SRP is equal to the YSP. Don’t bother looking on your good faith estimate from your mortgage lender retail loan officer for the SRP either as they do not have to disclose it to you. This is just like they do not have to disclose the YSP to you on the good faith estimate either.
What is Yield Spread Premium?
The YSP is based on the interest rate that you get from the mortgage lender. Just about every mortgage loan officer no matter where they work makes commission on the YSP and Points that they sell on any particular mortgage.
When a loan officer looks at a mortgage lender’s daily interest rate sheet they see two things: the base wholesale rate with no retail mark up and retail marked up rates. The pure wholesale interest rate will not pay the loan officer any YSP. So in order for the loan officer to make a YSP they have to increase your interest rate. So for example, let’s say that your base wholesale rate is 6.5% - in order for the loan officer to get 1% in YSP they would have to offer you an interest rate of 6.75%.
What Is A Point?
See What Are Points? Should I Pay Points? for a further discussion on Points.
Good Faith Estimates From Mortgage Brokers and Mortgage Lenders
Finally, here’s the meat of this article. As already mentioned, when you get a good faith estimate from a mortgage broker and one from a mortgage lender you will see a notation on the broker’s good faith estimate indicating that they are getting compensated from the lender. Usually this will be accompanied with either a percent spread that looks like: 0-3%, or you will see a dollar figure that covers what that percentage in points would be that looks like 0-$6,000, for example. A mortgage lender’s good faith estimate will not have this notation.
Without having to disclose the YSP to you, the mortgage lender can actually make it look and feel like they are charging you less than the mortgage broker by how they present their information to you. Often, when someone who either doesn’t know about YSP disclosure rules, or they have some agenda that you don’t know about, compares the two different good faith estimates – one from a broker and one from a lender – they incorrectly point out the YSP as an extra charge that you will be paying when you get your mortgage.
Misrepresenting a mortgage broker’s good faith estimate often happens by accident by people who do not know a lot about YSP, YSP disclosure rules, and how mortgage companies make their money. But, I hate to say this, it also gets intentionally misrepresented by mortgage and real estate professionals – and others - to steer uneducated unknowing unsuspecting home buyers and home owners in another lending direction. Unfortunately, many first time home buyers fall into this trap.
Be careful. And hopefully since you have read this article you will be more aware of not only your own mortgage quotes and shopping efforts, but that you can help a friend or family member who is facing the same questions and mortgage process as you.
