We have all heard the ads, "it's a no brainer", "I pay your closing costs for you", "no closing costs", "no cost refinance". Oddly an estimated five hundred thousand people have believed those ads and closed without ever knowing the truth.
Do you know how mortgage lenders make money? Sure, they make a little from you on origination fees but that's not all. They also make money "on the back" in the form of Service Release Premium (SRP) which is the difference between the amount you pay for the loan and the investor pays for the loan. What does this have to do with you?
Mortgage brokers "buy" money from the lender. The broker sells the loan to you at a price usually 50 to 150 basis points (bips) higher than they get it from the lender. This helps keep your "front end" costs down to a minimum. This is why brokers are called "wholesale mortgage brokers" because they "buy" from the lender at a wholesale rate and "sell" to you at a rate near retail. Truly it is not different than any other product or service. The broker can operate on a lower markup than say WalMart because they don't have inventory. They do, however, have some fairly massive liabilities from licensing to insurance, fraud control to advertising, back office salaries and commission, office space and equipment, and more.
The Mortgage Banker's Association recently released a report that indicates it costs somewhere around $2500 to originate a loan. According to our records this is a fairly accurate number. That's how much it costs us, as a broker, to originate a loan. Originate simply means the process from the first phone call to the closing table.
Generally the borrower will pay about 100 bips (equal to 1 percent) in a fee called the origination fee. On a $185,000 loan that would be $1850. Many loan programs actually allow the seller to contribute up to 600 bips to the closing so this fee is lost in the transaction (go to my website and you'll find where that went).
There are also other fees that some nationally syndicated yet local radio talk hosts with no background in finance like to call junk fees. Truth is he would rather have those fees hidden from you than to have them line itemed so you can see where your money is going. There is a processing fee which goes to the processing company or division which is generally between $400 and $650 depending on your originator. There is often a separate broker fee which goes directly to the broker to offset operating costs - it is separated so there is no commission paid to the originating loan officer which keeps your fees down in actuality. There are also companies who charge doc prep fees, handling and delivery fees and other fees.
There are also third party fees that the broker cannot control which include lender fees, underwriting fees, and others. The attorneys, appraisers, title companies, couriers, insurance companies, and government agencies also all want a piece of the pie. So the truth is the total cost of closing a loan (not including taxes, insurance and appraisal) can quickly approach 4% to 5%. If you live in Georgia and you are purchasing a qualifying primary residence your total closing costs are capped at 5% by the State and generally 4.99% by the lenders.
Okay, I'm getting to the point and that point is there is a "back end commission" available to the broker from the lender to be used as they choose. The lender shares a portion of their SRP with the broker in the form of YSP. Keep in mind that the cost to originate a mortgage loan - to the broker - is about $2500 and that is a fairly accurate number. Knowing this it is obvious the broker is going to need to realize a gross revenue of more than $2500 to stay in business - unless they are some rogue operator working out of their kitchen and omitting all the tools to deliver your loan securely and accurately - but I digress. Point is, there is commission and it can be used at the broker's discretion.
What if the broker offered to use the commission to be the only revenue they directly generate from your transaction? Well, some brokers and lenders advertise they pay the closing costs for you. This, my friends, is an absolute lie. Yes, they pay them but it comes from the commission realized on your transaction. Yet, if you knew for sure what was transpiring it may still be a great deal for you. I mean if you have a $400,000 loan and the normal interest rate would be, for example, 7% paying the broker a 1% commission and the broker raised the commission just 50 bips (1/2%) to 7.5% to cover all your closing costs, wouldn't it make sense to do so and you not to have to come out of pocket with any thing at closing? Sure, but is that truly a discount mortgage?
What about this, what if you could use the seller concessions to pay all the third party fees: attorney, title, appraisal, lender (lender and broker are different and you can save money going to a broker over directly to a national lender), etc., and the broker simply waived their front end fees? I mean if the broker left their backend commission markup at 50 bips like it would have been anyway?
That's a true Discount Mortgage! Now in all fairness to the broker you just cannot do this on a $185,000 loan. In fact, remembering that the loan costs about $2500 to originate - yes, even yours - the minimum loan amount just for the broker to break even would be $250,000. But brokers cannot just "break even". So if your loan amount is$300,000 or more, you can fully document your income, the property is your primary residence, the LTV is 80% or less, and (frankly) you are not a pain in the butt to deal with, you should be able to strike this deal with the broker.
Be careful! Just because you are dealing directly with the lender or a banker they will try and convince you they don't have these fees and therefore are already priced better than going through a broker. Nothing could be farther from the truth. They charge the same amount as a broker, or even a bit more, and just keep all the profit. Direct lenders and banks make as much as 8% to 10% of your loan amount as profit. The difference is only brokers are required by law to fully disclose their profits. Banks and direct lenders are exempted from that law. And, to make matters more confusing, there are certain people in a certain non-business friendly political party making a move to illegalize YSP to the broker meaning your choice in mortgages will be eliminated and you will be required to go directly to a big lender or banker because they will, at last and once again, completely monopolize the lending industry.
In a nutshell if you want to make this work ask your lender or broker for a quote on your mortgage. Once you receive that quote ask them for another quote but eliminating their front end fees - not all front end fees, just theirs. If they re-quote with the same interest rate jump on it! Chances are they will increase the interest rate by .375% or more. Keep in mind there just isn't much of a way to make this work on a loan of less than $250,000. Do not be afraid to ask, this could save you as much as $3500 or more. Also, don't expect every loan officer to immediately agree this is a good idea.
Ken Cook is Director of Operations at Novation Mortgage in Marietta, Georgia as well as a seasoned author and trainer. Novation Mortgage is licensed as a direct lender in Georgia and a licensed brokerage in Florida and Alaska. They also broker small business loans and commercial loans nationwide. http://novationmortgage.com 678-946-0100 for media contact for Ken.
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