This is a question many people do not know the answer to and one that, I think, is important for people to understand as part of the home finance process.

Loan officers, for the most part, are 100% commission employees.  In other words, they do not have a regular salary and therefore, the loan that they get from you and their other clients, is directly paying their bills.  Is that scary?  It doesn’t have to be.  Here is how it goes….

When a borrower goes to see Jo Loan Officer for a mortgage, Joe first will assess your ability to get one.  He spends time and, hopefully, expertise to get you the best deal he can.  That ability comes from knowing what lenders are “buying the market” or, in other words, have the lowest rate at that time.  One major advantage a brokerage has over your major banks is that the broker can check many different banks to try and find that ‘best rate’.  At that point Jo will take into account your needs and your desires and try to make the two ends meet in such a way that benefits you the most. 

During that process, while Jo is working on the details of your loan and shopping with different lenders he always checks how much each lender is paying for the specific rate he is looking for.  You see, lenders actually pay the loan officer/brokerage depending on what interest rate they lock in for their client.  If Jo charges you a higher rate, he gets paid more by the bank.  The lower the rate, the less the commisson or “yield spread”.  The process is very much a straight line, Jo has a responsibility to try and get the lowest rate while still making the commission that he needs to make to do the loan.

A fair goal on most loans in my opinion is 2 percentage points.  That means that if your mortgage is $200,000, then Jo, if he is a good guy, will probably gross around $4000.00.  That can be more or less depending on the type of loan etc.  Out of that money, Jo will most likely have to pay his brokerage and processor as well and the amount he has to pay for that varies with each brokerage.  Many times, it can equal roughly 1/2 a percent, so $1000.  Then he will obviously pay taxes which lessens that.  The other wild card in this is if Jo chooses to charge and “Origination Point” or a “Discount Point”.  In that case he would charge that point or points equal to percentage points up front in your closing costs.  This can be more than fair depending on the situation or it can be simply a way for dishonest loan officers to make more money. 

One reason Jo might charge these fees is to help keep your rate even lower and since the bank or banks aren’t paying enough for the lower rate, he must charge it up front.  So, if Mr. Smith wants a loan at 6% and the bank is only paying 1 point of yield spread, then Jo may charge 1 point “up front” to make his commission and still give Mr. Smith the rate he is looking for.  If however, the bank is paying 2.5 in yield spread and Jo is charging 2 points on the front, it starts to become questionable.

Some may think that 2 percentage point in commission is too much to pay the loan officer.  Well, for some loan officers who just hang out their shingle to make an easy buck, that would be a fair assessment.  But for the seasoned loan officer who has a career in this business and works hard and is honest, 2 points is more than fair.  What you are paying for is the expertise and service and time that does not come free.  Most people would not go see a doctor that was sub-standard just because he was cheaper.  Most would rather pay for the doctor that have the best standard of care possible.  The same is true with loan officers.  Doctors deal with physical health, loan officers are part of the picture that deals with financial health.  The assembly line lenders and part time ‘loan officers’, many times, do not have the experience or understanding to help the most with one of the most important financial decisions people make.