01 NovHow Mortgage Lenders are Paid

Ever wonder how your mortgage loan officer is paid?  Well, you will find out today…

Lenders are compensated in two ways: the front end and the back end.  The front end is everything you can see and know about while the back end is invisible to you.  Front end compensation includes any fees or upfront charges you incur.  Front end charges include loan origination fees, application fees or other, so called, “junk fees” on your mortgage.

“Junk fees” is an overused term and not all fees a lender charges are truly junk.  Mortgage loan officer typically have to pay someone to process and underwrite your mortgage.  Instead of the lender paying for these out of their own compensation, lenders typically pass this charge on to you as the customer since they would not incur these costs unless you were obtaining a mortgage.  If you start to see a processing fee, administration fee, underwriting fee, doc prep fee, application fee, etc, then you can safely assume some of these fees are indeed junk and will help to compensate the lender further.

Back end compensation is income generated through the sale of your mortgage based on the type of mortgage and the rate that was negotiated between you and the lender.  Here is an example of what the rate sheet may look like to the lender when you are inquiring about rates:

What this shows is the income or cost of each rate the lender provides to the customer.  On this day, for example, 6.25% provides an income of .216% on a 30 day lock period where as a rate of 6.00% costs .888% (100-99.112) and a rate of 6.50% generates income of 1.088%.  So, by increasing your interest rate, the lender is able to generate more income.  Most lenders wont do a mortgage loan at 0% back end compensation.  The amount the lender makes is based on the geographic location and competition in your area.

In some states, Colorado for example (some lenders are exempt), the mortgage lender is required to provide a statement of both their front and and back end compensation.  Ultimately, keep in mind the previous post about Mortgage Shopping.  You should consider both the price and your comfort with whom you choose to work.  Imagine buying an identical apple at two different grocery stores.  If they both charged you $1.00 for that apple, would you really care which store made money as long as the quality was the same?  Don’t assume that just because one lender makes more money than another that this in some way hurts you, it may not.

About the Author | Scott & Marla Wynn

Scott & Marla Wynn are mortgage lenders with a focus on education. We believe an educated customer is our best customer. The mortgage industry has complicated the process of obtaining a mortgage so much that most customers believe the best way to select a mortgage lender is to inquire about rates and fees. Although rates and fees are an important part of the mortgage process, there are much more important areas to be concerned with. Lending A Hand was created to pass along our experience, knowledge and research to YOU to allow you to become a more educated mortgage customer. If you are planning a home purchase or refinance and live in the state of Colorado, we hope you select the Wynn Team as your mortgage lender!