A Quick Word Before We Begin
I'm going to let you in on a few industry secrets and show you:
1. How the industry works
2. How most loan officers do business
3. How I work
First, you’ll get a “behind the scene” look at how our industry operates which will lead in to how most mortgage professionals operate within the parameters given to them and finally how I conduct my practice and serve my clients in a manner that vastly differs from many of my peers and delivers an exceeding amount of value to my clients.
You may be tempted to skip section 1 and even 2, but I ask you to resist the temptation and press on to read both of them as each will contain information that you need to know in order to fully appreciate the difference of my value proposition and make a better more informed choice when it comes to selecting the mortgage professional to advice you and secure the financing terms on your next home loan.
Upfront Flat Fee
How the industry works
Every business day, wholesale lenders publish rate sheets for brokers to “price” their loans off of. The broker then offers you a “retail” rate by either charging you “origination points”, increasing the wholesale rate higher so that the lender will pay them a “rebate” (backend points), or a combination of the two. Retail lenders, like your bank or credit union, essentially do the same thing… except that bank loan officers only have one rate sheet to choose from and someone from their pricing department has already put in the banks profit calculations (although, if the loan officer wants to make more money off of you he can charge you “overage” – meaning more points or a higher rate beyond what’s considered normal for that bank’s profit objectives). Either way, the industry standard for how the broker or loan officer’s commission is derived is ultimately based on a percentage of the loan amount (often referred to as “points”) – thus, the larger the loan amount, the greater the commission is for the originator.
*For simplicity’s sake, I will limit distinction between mortgage brokers and bank loan officers and simply lump them both into the same industry accepted terms for both of “loan officer” or “originator”.
How most loan officers do business
As in any industry, variance among pricing is wide ranging. This should be expected as different lenders, banks, brokerages, and loan officers have different profit objectives as well as value offerings. I have seen colleagues and competitors charge anywhere from a half point to FIVE points (yes, 5!). The lower end usually consisting of the type of originator who simply offers a loan with little to no value add in the advice arena and the higher end usually consisting of the type of originator who not only doesn’t offer valuable advice but also preys upon the vulnerable, lies to the borrower (and lender), takes advantage of the homeowners ignorance, pays illegal kick back fees to scrupulous real estate agents (or acts as both lender and agent for the entire transaction), and is the type of jerk (it put it lightly!) that you have seen reported on TV news of the subprime debacle of 2007-08 that has deeply blemished the mortgage industry. Fortunately, since investors of mortgage backed securities have stopped buying 100% No Down Payment loans made to people who stated (lied) about their income (and in many cases – their “reserves”), most of the “jerks” have been purged from originating loans because no one will fund those loans any more and they never learned how to qualify a borrower using pay stubs, W-2s, and bank statements! Much more could be said on this topic… but let’s focus on how the majority of good willed brokers and loan officers mark up their loans.
I once worked for a well respected boutique mortgage planning firm whose broker owner had established an unprecedented practice – that all loans originated would have a profit objective of 1-1.25% with the occasional loan priced under one point in competitive situations and 1.25% being the cap. He would actually turn away “top producing” loan officers who charged more and wouldn’t reform their mark up ways. Quite frankly, the knowledge he brought to the table – and trained his loan officers to bring – in the advice arena warranted higher fees; however, he believed that:
- 1-1.25% was the industry average
- Charging more could easily be interpreted as a “rip off”
- And that extending a higher degree of valuable advice at a fair price would inevitably lead to a greater level of client and partner satisfaction which should lead to a higher percentage of repeat business and referrals
Given how trustworthy, likeable, and respected this broker owner is – it’s not surprising that he holds this view …and has a successful personal practice and firm! Much of what I learned from him I still carry forward with me today.
While there is no independent, third party who keeps track of lender mark ups and commissions, I can say from my competitive experiences, conversations with escrow officers, title reps, and wholesale account executives who see way more volume than I do, that it’s fair to say the bulk of loans – or the median – falls within this range.
A more empirical example is to view a month of fundings for the company I work for – Pacific Mortgage Consultants (PMC). In the first 25 days of January of 2008 73 loans totaling $33,030,546 were funded with a total of $424,990 of fees collected by PMC (not including processing fees as this is generally not considered part of the origination fee – FYI, standard processing fees run from about $400 to $600). If one does the math, it comes out to 1.2866%.
So, while I believe this is a fair range as far as mark up is concerned, there are elements within how LOs quote their fees AND how much they make.
The main problems are:
Loan officers are rarely upfront with their fees. When’s the last time you called a broker for a rate quote and he told you what his fees were (including the “rebate” – defined above – especially on no point loans). Good Faith Estimates (GFE) are a helpful way to get a better picture, but unfortunately it’s not uncommon for them to be incomplete, vague (“2% or less” for the rebate section), or not issued until closing when they serve little use.
Loan officers have also been known to either lie on the initial GFE and use bait-n-switch tactics that aren’t found out until closing or quote one fee genuinely, but close with a higher one (often due to the loan officer gambling on your rate lock by not locking your rate in hopes of the market improving and him locking in at the same rate with improved rebate pricing to boost his bottom line rather than pass on that good fortune to you – of course, should the gamble go the wrong way, he’ll be the first to blame you for not getting in some document in time or blaming the market for moving so quickly “in these volatile times” and pass on the worse pricing to you while preserving his commission!)
The amount of fees typically charged by many loan officers is not only unjustifiable but also a plain rip off. This is a sensitive point to read for many homeowners as well as my peers in the industry. To the latter, some may see this point as down playing the work done “behind the scenes” in order to get a loan through the system (which indeed can be substantial) and ignoring fact that they aren’t paid a salary or wage nor anything for their prospecting efforts to actually “find” a fundable loan to begin with (not limited to time invested, but also money and resources to pay for marketing and advertising campaigns which can be costly and by no means guarantee success or profit). But to the former, homeowners often see the process of getting a loan as nothing more than that of filling up a very large gas tank. Just as a car needs gasoline to run, so do most Californians need a loan to own a home. To most homeowners, both are seen as necessary evils. And just as rising oil costs have led to higher gasoline prices, the run up in real estate values from 2004-06 have by default led to higher home loan fees and expenses. If the value delivered by the typical loan officer had also increased, this may not even be worth mentioning; but sadly too many homeowners have been frustrated by the unperceivable amount of value derived from the whole loan transaction in exchange for the large fees paid. It’s no wonder homeowners shop around for the lowest rate and fees – the mortgage industry has become commoditized and has no one to blame but itself. If brokers and banks would’ve done more than just hire “order takers” who take phone calls, quote a rate, and then show up with loan docs to sign 30 days later – then this point might not even be worth making. While no doubt, there are indeed some professional Mortgage Planners who have invested in their trade, received advanced education, keep current on market activity and the factors which drive it, and have taken the time to hone their skills in order to deliver a high level of advice to their clients, sadly, these are still the minority in a sea full of blowfish, minnows, and sharks posing as intelligent dolphins.
Paying higher fees just because the loan amount is higher seems unreasonable. This is not a point most homeowners think about – but considering the above point, it makes sense! For example, say you were selling your home, moving up to a new one in a better school district with a bigger yard and nicer neighbors (well, hopefully!). You find a home for $800,000 and were debating whether or not to put down the $400,000 from the proceeds of your just sold home or only put down $200,000. Either way, your new mortgage would be a single loan requiring the exact same amount of documentation from you and the exact same amount of work to be completed by your loan officer and his staff. When you think about it – why in the world should you pay him and his company fees 50% higher (1% on $400K would be $4K and 1% on $600K would be $6K), especially if he doesn’t extend any sound financial advice where to as why you would want to pay a higher rate for the jumbo loan, nor extend any referrals to truly helpful professionals in his network that’d enhance your financial well being, nor really deliver any service atypical to any other loan agent you’ve dealt with before? Why!? Simply because this is how it has worked for decades - "why not" is what most mortgage originators would ask? But now you know better!
How I work
When you choose to do your mortgage with me, you can rest assured knowing that your fee will be:
· Quoted to you upfront
· A fair and honest price
· Backed by quality advice
Furthermore, you can relax knowing that your fee:
· WILL NOT change at any point
· WILL NOT increase based on a vested interest
How can I submit these claims to you with so much confidence? Plain and simple, I charge an upfront flat fee regardless of loan size! You’ll know it before you even commit to me as your broker of choice and the fee will not change during the course of the transaction no matter what difficulties may arise.
I’ve carefully chosen the fee to be a fair price for those who have owned their home a long time or have aggressively paid down their mortgage and thus have smaller loan amounts. First time home owners will find the fee to less than most other offers out there. Luxury and executive homeowners ($1m+) will find the fee to be a down right bargain as they will not needlessly be required to pay a larger loan fee (usually measured by five figure’s as in $10,000’s and multiples there of pending on the number before the six zero’s on the loan amount).
Perhaps best of all is the fact that trust is much easier established and deepened knowing that the quality advice I give in my Mortgage Planning Practice is not vested in an attempt to increase my loan fee based upon increasing your loan amount, when I lock in your loan, or any other recommendations I may make!
I will not “take advantage” of you and charge you a large fee that I could possible “get away with” based on your lack of experience in getting loans, lack of time to sift through the details, bad credit, small loan size, need to consolidate other debts, or any other reason one could think of! (Not that everyone who doesn’t charge a flat fee in the industry necessarily “takes advantage” of their clients, but taking away the financial incentives does take that possibility off the table).
I will do all of this for you on your next loan with me WITHOUT SACRAFICING SERVICE or the level of advice that you deserve and I take pride in delivering!
As you will see in How I Work in the next 4 answers, the value proposition I’m extending to you goes beyond price. In my industry, there is a movement going on in attempt to fight the “commodity trap” which has squeeze profit margins and caused many brokers and lenders to go out of business. The common phrase pushed around in this movement is “advice over price”. Thus, by elevating his knowledge of the market and how to help clients complete their financial picture by bringing in the liability side of the balance sheet into consideration along side with the assets when establishing, reviewing, and updating one’s financial plan… he can then justify a higher rate/fee/points/etc based primarily upon the value of his advice. Quite frankly… I agree with the logic behind the argument. But I’ve chosen to direct my practice in a different direction.
“Why?” you might ask.
Two reasons:
1. First, from a conscious perspective – it just feels right, more integral, and easier to “sell” when I don’t have concern myself with how to make more off of each client and maximize my profit on each and every loan.
2. Second, from a business perspective – in my industry, the loan originators with the largest number of happy clients and satisfied referral partners are the ones who generate the highest number of repeat and referral business – and ultimately the highest income levels as well. Simply said, I’d rather maximize the quantity of loans I do rather than the fees I could make off of fewer loans.
Current Origination Fee: $3495 per loan*
Compare the savings for yourself!
Remember, as mentioned above, the average loan origination mark up, whether through a broker or retail bank (they don’t keep the loan, they sell it to Wall Street), is 1-1.25%. With this in mind, I’ve created the following grid to show you what that translates in savings for you were that comparison be solely based on origination points (if you went with a zero point loan and thus paid a higher interest rate, the difference to you in total interest you’d pay would be higher, but for the simplest illustration, this will suffice). The numbers in green represent the amount you’d save by choosing my flat rate and the numbers in red show where another lender would have a lower origination fee.
Loan Amount |
Fee |
Origination |
Average Savings |
Average Savings |
$200,000 |
$3,495 |
1.75% |
($1,495) |
($995) |
$250,000 |
$3,495 |
1.40% |
($995) |
($370) |
$300,000 |
$3,495 |
1.17% |
($495) |
$255 |
$350,000 |
$3,495 |
1.00% |
$5 |
$880 |
$400,000 |
$3,495 |
0.87% |
$505 |
$1,505 |
$500,000 |
$3,495 |
0.70% |
$1,505 |
$2,755 |
$600,000 |
$3,495 |
0.58% |
$2,505 |
$4,005 |
$700,000 |
$3,495 |
0.50% |
$3,505 |
$5,255 |
$850,000 |
$3,495 |
0.41% |
$5,005 |
$7,130 |
$1,000,000 |
$3,495 |
0.35% |
$6,505 |
$9,005 |
$1,500,000 |
$3,495 |
0.23% |
$11,505 |
$15,255 |
$2,000,000 |
$3,495 |
0.17% |
$16,505 |
$21,505 |
$2,500,000 |
$3,495 |
0.14% |
$21,505 |
$27,755 |
$3,000,000 |
$3,495 |
0.12% |
$26,505 |
$34,005 |
$4,000,000 |
$3,495 |
0.09% |
$36,505 |
$46,505 |
As you can easily see, there are significant savings provided to you in this pricing model – especially for those with super jumbo loans!
Admittedly, if your loan is less than $250,000 you may be thinking “Why would I go with Sean, his fee higher… so wouldn’t my costs and/or rate be higher?”
Good question! But if you stop here, you’ll miss how selecting an average loan officer to do your mortgage – even if his origination fee is lower – could still end up costing you $2,000… $4,000… even more than $5,000 more! You don’t want to miss my response to using the lender who’s selling the cheapest money! (Question/Answer #2) In it, I’ll describe why most mortgage brokers really ought to drop the word “broker” from their job description and how all bank loan officers come up empty handed when it comes down to providing the lowest total cost for your loan!
Attention Home Sellers, Home Buyers, Investors, and Tax Payers
As more of a side note rather than a concluding one, I’d just like to point out that I do not believe this flat fee pricing structure should be applied to a Realtor’s commission. While there are indeed some real estate agents who do offer flat fees (usually for listings, very seldom for a buyer’s agent), I highly recommend you shy away from any such offer as tempting as it may be to “save” thousands in agent commissions. A good Realtor invests in every single transaction. On the buyer’s side, the investment is much more laborious and time intensive in order to help the buyer find just the right house, then secure excellent contract terms, and finally manage all the details while in escrow. In a listing, a good agent’s financial investment in procuring photographs, video, virtual listings, info flyers, mailers, personalized web site domains, toll free info hotlines, and placement in industry advertising publications can be substantial! Electing to go with a cheap agent who will basically just throw your house on the MLS, put up a For Sale sign in your front yard, and wait for any low ball offer to present to you isn’t the best way to get the “top dollar” (as measured by NET PROCEEDS, i.e. Sales Price – Improvements – Commissions/Escrow/Title). Further more, in any “buyers market”. I highly advice against selecting a “discount brokerage”. You want an agent who is going to invest in selling your home, go the extra mile to get the top dollar, and do the “out of the box” marketing methods to attract a greater number of eyeballs to your house which leads to more buyers coming out to your house which leads to quicker, more qualified, and higher offers than if the house is improperly marketed!
As far as Financial Planners and CPAs are concerned, ask yourself, would you really want a financial professional whose goal it is to either maximize your investment returns or minimize your tax obligations and not have him or her be incentivized financially to do a better job? Enough said!
* Any “2nd” or Home Equity Loan done concurrently with a new first mortgage will not incur any further origination fees (in other words, I don’t mark them up any, you’re truly getting the “wholesale” rate), but will still be subject to additional, standard fees such as title, lender, and processing fees.
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