I get asked a lot about how I get paid. The answer is both straightforward and complex at the same time. I’ll give it my best shot here.
It is important to state that Loan Originators, the person you are working with on your mortgage, is considered a Sales Person. As with most sales positions a Loan Originator is paid, usually, on a commission basis. Sometimes that commission is a simple dollar amount per loan closed, sometimes that commission is a percentage of the loan amount. That percentage can vary wildly between mortgage companies and even Loan Originators within the same company or branch. It’s not uncommon for two Loan Originators working for the same company or same branch of a company in cubicles or offices next to each other to be compensated very differently.
Often branch managers and more experienced Loan Originators make substantially more than more junior Loan Originators.
Loan Originators paid on commission are paid as a percentage of the loan amount. It is important to note that lenders are paid on the loan amount and not the purchase price. The terminology for how a commission is calculated are basis points, or bps (pronounced bips). A bp is 1/100th of a percent. So, 100 bps (bips) is 1 percent of the loan amount. As an example, if you are purchasing a $500,000 home and are putting 20% down ($100,000) the loan amount would be $400,000 and if that Loan Originator makes 100 bps on the loan their compensation would be $4,000.
The higher the loan amount, the more the Loan Originator makes. Period.
The only way a Loan Originator can make more off of your loan is to have a higher loan amount. Now, this could be by you purchasing a more expensive home, or it could be by talking you into putting less down. A good Loan Originator will always talk you through the pros and cons of putting more or less down and give you examples that personally apply to you so you can make an informed decision. It is often true that putting less down can make sense to the buyer.
Using the above example let’s say you are still purchasing a $500,000 home but you decide to put 10% down instead of 20% down. Perhaps you realize that the extra $50,000 can help you furnish the home, pay down some bills or buy a new car. As long as it makes sense you can do this. In this example, the lender would make 1% additional off of the $50,000 higher loan amount, meaning their compensation would increase from $4,000 to $4,500 for your loan.
Most Loan Originators will also show you different programs that may make sense for your situation. You may have the option of an FHA loan, a VA loan, and thank you for your service, or a First Time Homebuyer Conventional Loan. The actual loan amount between these programs make has small effects on the loan amount, but the compensation for the Loan Originator will not change, normally. As an example, if you are choosing between the 3.5% minimum down of an FHA loan or the 3% down of a conventional First Time Homebuyer program that difference is a difference of $2,500 in the loan amount or $25 to the Loan Originator.
Thus, with one Loan Originator working in a call center they may make $500 for originating a $400,000 mortgage or you might work with a Loan Originator who makes 250 bps on the same loan meaning they will pocket $10,000. In either scenario, you may have the same rate, same closing costs, and your disclosures might be identical. When a Loan Originator makes less, the company makes more along with the converse. It is not uncommon for a mortgage company to make 350 bps, the maximum allowed by law, on a mortgage. Thus, using these two examples, the company stands to make somewhere between $13,500 and $4,000 on the same loan based solely on how they pay their Loan Originator.
Finally, if your Loan Originator works for a branch and has a branch manager and/or sales manager they may receive an override or part of the commission. Essentially if your Loan Originators’ company takes 50 bps off the top of each loan for-profit and services then the difference between 300 bps and what your Loan Originator makes is what the branch, branch manager and/or sales manager might make. Regardless, none of this changes what your closing costs and fees associated with the loan are. This is just what the lender is paid to originate the loan, remember this is all just sales.