Mortgage brokers are invaluable agents in the mortgage industry. They search for suitable loan packages and equally onboard borrowers while serving as an intermediary between the two parties until the transaction is complete. Remember that mortgage brokers do not offer their services for free. This is how they get paid.
Who Pays Mortgage Brokers?
Mortgage brokers get paid by two people, the lenders and the borrowers.
Mortgage brokers work directly with mortgage lenders (banks and financial institutions) to onboard intending homeowners whose profile (credit ratings, choice of the home price, etc.) fits the available mortgage packages. Usually, a borrower may pay a broker two kinds of fees, a finder’s fee, and a broker’s fee. In many instances, the borrowers pay the finder’s fee in advance of closing the deal. This is to serve as remuneration for finding a suitable lender and arranging the transaction. Generally, the loan type affects different aspects of the mortgage transaction, including the broker’s fee. Depending on how easy or complicated a mortgage is, a broker may charge a small to medium broker’s fee or no fee at all.
Mortgage lenders are mortgage banks or other financial institutions that provide mortgage loans to intending homeowners for an agreed interest based on the principal. Generally, lenders pay a commission to mortgage brokers on every mortgage transaction originating from the mortgage brokers. There are two types of commissions a broker earns from the lender on every mortgage deal. They are an upfront commission and ongoing commission.
A. Upfront Commission
An upfront commission is paid to the mortgage brokers as soon as a mortgage is closed. This commission value depends on certain factors surrounding the loan type. Upfront commissions are usually between 0.5-1%.
B. Ongoing Commission
Apart from the upfront commission, the mortgage brokers earn an ongoing or trail commission for the entire period or term of the mortgage. This commission is usually received monthly and is reset every year based on the remaining principal until the mortgage is fully paid. Mortgage Brokers may lose their ongoing commission immediately after a lender defaults their payments.
The Loan Type
The loan type is crucial in deciding how much commission is earned by the mortgage brokers. Principal amounts and terms generally set mortgages apart, thereby influencing how much a lending institution is willing to pay as commission. This, in turn, affects how much a broker may earn on specific loans as commission. For example, a 1% commission will earn a broker $5,000 on a $500,000 loan while a .5% commission will give him just $1,000 on a $200,000 loan. On the term, a broker will continue to earn an ongoing commission for as long as the term of the mortgage.
Note, that the law prohibits brokers’ commissions from being based on loan terms. However, lenders set a commission percentage (%) that may vary with particular mortgage deals originated by brokers. This means that loan-specific factors such as amount will subsequently influence how much commission a broker ends up earning.
The Dodd-Frank Act (2010)
After the great recession of 2010 and the contributions of the mortgage industry to the 2008 financial crisis (a precursor to the recession), it was evident that the housing industry needed to deliberate. Authorities needed to enact newer regulations in the financial sector, which would prevent another disastrous large-scale collapse. This gave birth to the Dodd-Frank Act.
Known fully as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Dodd-Frank Act introduced new regulations that affected the entire financial sector. Specifically, to the mortgage industry, the act provided new as well as codified existing regulations surrounding compensation practices in the industry.
No Dual Compensation
This regulation prevents mortgage brokers from receiving compensation from both lenders and borrowers, at the same time, on the same mortgage deal. This law was enacted to protect lenders as well as prohibit the unethical practice of originating and closing mortgage loans that lenders know would end in default.
The Dual compensation act prohibits mortgage brokers or loan originators from receiving payments both from the mortgage brokers or company and the intending homeowner.
The act does not prohibit mortgage brokers from receiving an upfront fee from the borrower, despite receiving a commission from the lender. This means that a broker may obtain a brokerage commission from the lender after having received a finder’s fee or upfront fee from the borrower.
While mortgage brokers generally get paid by either the borrowers or lenders, brokers earn most of their remuneration from lenders. This usually happens after the deal (loan) has been concluded. Depending on the mortgage company, remuneration may take place between 1-30 days after the release of funds to the borrower.