The great news is that it’s not by padding your closing costs.
All of the fees that you see on your Loan Estimate are highly regulated and will be justified by actual invoices at closing.
- Fees collected on behalf of third parties, such as a homeowner’s insurance company, appraiser, HOA etc – must be remitted to that third party.
- Escrow collections are limited to 1/6 of the total escrow charges based on your exact property taxes and homeowners insurance policy.
How do mortgage loan officers make money?
The mortgage company compensation/fee is built into your mortgage interest rate as a percentage of the loan amount.
If the interest rate is higher, then the compensation is probably also higher. Other things like credit score, loan program, down payment amount and the type of property can also affect your mortgage interest rate. These are knows as “risk adjustments”. But if your mortgage interest rate seems high for no apparent reason, it’s time to shop around.
As for individual mortgage loan officer pay, it is usually commission based as well, but as a percentage of the above mentioned mortgage company compensation/fee. If the mortgage company provides the leads, the percentage of commission is smaller. If the loan officer is responsible for marketing and finding their own business, the commission percentage is higher.
Big banks and credit unions will usually pay a fixed salary, along with small bonuses. Don’t be fooled into thinking this means lower interest rates for you – large brick and mortar businesses will always have more overhead expenses to account for. Not to mention the pay and bonuses for the multiple levels of management that oversee the “working bees”.
What will my services cost you?
Usually nothing. The wholesale lenders I work with will pay my broker a commission on each loan I close. It’s strictly based on the loan amount, and I make the same regardless of the interest rate you choose, the loan program you decide to use, or which wholesale lender I send your file to.
Best of all – I have no monthly quota to fill, other than my personal financial goals. My true incentive is to be genuinely helpful, close loan on time (or ahead of schedule!) and earn future referral business.
Not all loan officers have to disclose how much they make, or what it is based on
There is a subtle difference that the general public isn’t usually aware of. Mortgage Lenders and Mortgage Brokers are two different businesses, and they are regulated slightly different.
First Class Home Mortgage is a local Utah mortgage broker.
Mortgage brokers don’t underwrite or fund the loans themselves. They put together loan applications, verify credit and assets, counsel borrowers in regards to their loan options, and pair them with wholesale lenders.
Mortgage lenders underwrite and fund mortgage loans. They have the option of selling the servicing rights (the act of collecting mortgage payments) for extra profit. They also have the ability to sell their loans on the secondary market to entities like Fannie Mae/Freddie Mac/Ginnie Mae.
When the real estate market crashed in 2007-2008, mortgage brokers were demonized. But mortgage brokers were never the ones making the rules or approving the loans. Direct lenders were. And direct lenders were enabled by the secondary market not exercising proper supervision, and not having proper safeguards in place.
Mortgage Brokers are now highly regulated. Direct Lenders still have loopholes for abuse.
One such loophole is the ability to hide exactly how much compensation is received from a loan.
Mortgage broker compensation is limited to a maximum 2.75%, with most local small brokerages in Utah hovering around the 2% mark. This can be built in the interest rate (lender paid compensation – most common), or it can be charged directly to the borrower as an origination cost (borrower paid compensation). Never both.
If the compensation is built into the interest rate, it will be disclosed on the Closing Disclosure as a fee paid on your behalf by another party (the wholesale lender that underwrote and funds your loan).
If you are being charged an origination, it will be obvious on the Loan Estimate you receive with your initial disclosure package.
Direct lender compensation can be built into the interest rate without any need for disclosure. Therefore, there is no cap on how much a loan officer for a direct lender makes – it could be as high as 5% or more. And they can also charge an origination cost on top of it. The only limitation is how much they can get away with – or the Qualified Mortgage Rule.
The Qualified Mortgage Rule (enacted January 2014) mandates that a borrower cannot be charged more than 3% in points and origination fees. Unlike mortgage brokers, any profit a direct lender makes on the back end of an interest rate is not disclosed, and therefore not considered in the 3% calculation. Oops.
Direct lenders can be your bank, your credit union, or any mortgage “banker”. A more special category that isn’t really a direct lender but acts like one is a “correspondent lender“. Correspondent lenders are usually large mortgage brokers that figured out how to get a bigger piece of the pie. They have enough capital and reputation to approve and fund mortgage loans by using lines of credit. These loans are sold (flipped is a better word) immediately after funding. The risk is removed from the mortgage broker, and their compensation can now be hidden. And uncapped.
What about the Preferred Lender?
If after reading the above you still don’t think it’s a big deal, consider the situation that allows for the most abuse.
When you try to buy a new construction, the builder will almost always have a preferred lender that they’ll push you to use. There will be all sorts of shiny incentives, from construction upgrades to seller paid closing costs.
If it feels like a good deal, think again. The loan officer for the preferred lender will always have the ability to hide his/her compensation, and this is no coincidence. Shop them around to reveal the true cost of using them.
Yes – kickbacks between builders, lenders and real estate agents are illegal. But how do you prove it? Just because one party is advocating heavily for another party to make an indecent amount of profit.. That’s not enough evidence in itself. Or enough to report them to the Utah Division of Real Estate.
Watch out for the real estate agent preferred/in-house lender as well – same possibility for hidden profits/shenanigans. Especially if you feel like you’re being pressured to use a certain lender.
The best thing you can do to protect yourself besides asking for a second opinion is this CFPB (Consumer Financial Protection Bureau) tool. Just select Utah as the state and your loan parameters. You will instantly see where how the interest rate you’re getting stacks up against what other mortgage companies are offering.
Questions to ask when shopping for a mortgage loan
- Will there be an origination charge, or are you compensated by a lender?
- Will you fund my loan at closing, or will it be funded through a lender?
- Will my loan be sold or serviced after closing?
- Can I get a quote without a credit pull? (the answer should always be yes!)
- If I get a better quote, will you match it? (this is a must with preferred lenders)
If you dread the thought of multiple credit pulls, know that a credit pull is not a requirement for receiving a mortgage quote. Any loan officer can run the numbers if they know some of the basics: purchase price, downpayment amount, approximate credit score and loan program.
If a loan officer insists on a credit pull and/or additional documentation, move on. It’s just a sales tactic to get you invested in working with them. Or mention you’ll check with the Division of Real Estate, that’s usually an effective attitude adjustor.
My intent is not to scare or overwhelm you. My goal is to empower you to create change. Because I can’t do it alone.
There are plenty of honest people in the industry. Not all businesses turn greedy when in a position to get away with it. But you have to make sure they have an incentive to stay honest.
Shop around. Ask questions.
Give your business only to the ones that earn it and deserve it. Look past incentives, don’t worry about hurt feelings, and choose wisely. Look for transparency and good communication. Consider supporting your small local mortgage brokers over national brand names.
Also keep in mind that the lowest interest rates don’t necessarily equate great customer service or more importantly – competence. There are plenty of horror stories out there to keep you up at night if you feel like googling.