How Much Is the Loan Officer Really Making On Your Transaction?

 You have a right to know how much every player in your real estate transaction is being paid. Real estate regulation mandates this disclosure. By far, the trickiest compensation to accurately gauge is the loan officer’s. This article will explain all of the ways that a loan officer is compensated in your transaction and how you can get this information.

A loan officer can be compensated in four ways:

-         Points of Origination (a separate item on the Good Faith Estimate)

-         Points of Discount (a separate item on the Good Faith Estimate)

-         Junk Fees (usually listed on the Good Faith Estimate but disguised)

-         Yield Spread Premium (direct payment from the lender – not usually listed accurately on the Good Faith Estimate if listed at all)

 Let’s take a look at each.

Point of Origination and Points of Discount - These are both separate items that will be listed near the top of a Good Faith Estimate. The Good Faith Estimate is the loan officer’s written best estimate of closing costs and should be provided to you within three days after a loan officer takes your loan application. Both Points of Origination and Points of Discount are referred to collectively as “the points” that are charged to you by the loan officer. They are part of closing costs.

There is an important difference between the two. Points of Origination are supposed to be the only fee that a loan officer can directly charge a buyer/borrower for the actual work of originating and completing the loan. Points of Discount are supposed to be used only to “buy the rate down” and not for loan work by the loan officer. Some loan officers will deceptively list fees for loan work (Points of Origination) as fees for buying down the rate (Points of Discount) and then cover that up by saying, ”Hey, I’m only charging you 1 Point of Origination for my loan work. The other 1 Point of Discount appearing on the Good Faith Estimate is being used to buy down the rate. I’m not getting any of that.”

One way to make sure that any Points of Discount are actually being used to buy the rate down and not going directly in the pocket of the mortgage company is to have the loan officer agree to provide you with two documents: a copy of the rate lock confirmation after a loan officer receives it and also the daily rate sheet from the lender that the loan officer is using to quote your rate and how much it will cost to buy down a rate. Rate sheets are not that hard to explain. If you are confused after a loan officer’s explanation, there may be some purposeful deception going on.

Junk Fees – These are fees charged for services but no work is actually being done. In other words, the money goes straight into the mortgage company’s pocket. At the bottom of this article, you’ll see a link to a sample Good Faith Estimate. If you receive a Good Faith Estimate from a loan officer that shows fees that are not on the sample Good Faith Estimate on my site, the extra fees are probably junk fees. If you strongly suspect that something is a junk fee, tell the loan officer to remove it from the Good Faith Estimate because you simply won’t pay it. You’re in the driver’s seat in a real estate transaction. You won’t overpay if you demand your rights.

Yield Spread Premium – The more valuable a loan is for a bank, the more that the bank will directly pay the loan officer who originated that loan. The higher the interest rate, the longer the prepayment penalty period, the higher the margin on the adjustable rate, the more the lender will pay the loan officer directly. This payment is called Yield Spread Premium, or YSP for short. The YSP will be listed on only one document. That is the rate lock confirmation sheet, when it arrives. Request that the loan officer provide this to you as soon as he or she receives it. It is important to note that YSP will almost never be stated accurately on the Good Faith Estimate.

Understanding all of the sources of loan officer compensation for a loan is very important. You may get a Good Faith Estimate and think that the 1 Point of Origination is a fair price, unless you also found that the all Points of Discounts charged were being pocketed and not used buy down rate, and that junk fees totaled $1,500, and further that the loan officer was getting paid two points of YSP by the lender. Knowing how to identify all forms of loan officer compensation can often mean the difference between getting a fair deal from a loan officer or getting ripped off.

Here are links to a few pages in this site that will help to better understand  this article:

Here is a Sample Good Faith Estimate With Explanations

Here is a List of How Everyone In A Real Estate Transaction Is Paid

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