Saturday, October 20, 2007

What your broker isnt telling you

Your broker may be making more money on your transaction than you know. Hidden payouts to brokers are prevalent in the industry, and only insiders know how to spot them. Obviously brokers and loan officers need to make money, they are providing a service and closing your loans is how they make their living. The question you need to ask yourself is: Do I know how much money my broker is making? The bottom line is, if you don’t know the whole story, you may be paying for it in your interest rate and monthly payments.

With all the terminology and pages to sign, borrowers get caught in a whirlwind of paper and don't always know what they are getting themselves into. Make sure you understand the terms and ask your broker what the fees and costs are up front, that way everyone involved is on the same page. Brokers make money in 3 ways on loan transactions. The most well known is "points". The other two secret revenue generators are "junk fees" and rebates.

Points refers to the number of points you are charged out of pocket to pay the broker for his services. They can also be referred to as percentage points or origination fees. Some brokers don’t charge points and only make money on Junk Fees and rebates, others don’t charge anything up front, and only make their revenue on rebates. In my opinion .75 of a point to 1.5 points is a typical benchmark for a normal loan transaction. This means you would be paying .75% to 1.5% of your loan amount directly to the broker out of your pocket.

Junk Fees are an industry standard that refers to lender fees and broker fees charged to cover company overhead. These fees show up as line items like, "underwriting", "processing", "administration", and other similar titles. Typically the lender and broker will each charge their version of these junk fees.

Rebates are the biggest hidden pay out for brokers. This revenue stream is also known as YSP, yield spread premium. It is money paid directly to the broker to charge you a higher interest rate on your loan. This tool was designed to help borrowers and brokers on transactions where borrowers had limited cash and were unable to pay for services out of their pockets. The idea is, a broker can still offer you a loan and make money without charging you directly. The fees are built into your loan as a higher rate and distributed across the life of your loan in higher monthly payments. When used with care this is a great way to help borrowers obtain financing without paying costs directly from their bank account. On refinance transactions these fees can also be rolled into your loan amount, so no out of pocket expense is incurred.

I have personally seen brokers make upwards of 5% on a loan transaction by charging points up front and receiving rebates from lenders. On a typical California transaction, this is a huge amount of money. The most appalling part of this is many borrowers have no idea that their broker is walking away with huge sums of money. If the broker is also serving as a real estate agent on your purchase, they could be making up to 11% on your home purchase!

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