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What is Borrower Paid versus Lender Paid in Mortgage Transactions?
What do mortgage lenders mean by borrower paid versus lender paid compensation in mortgage loan transactions. Why does the borrower need to pay discount points on borrower paid compensation and does not pay any upfront discount points on lender paid compensation.
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2 Replies
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In the mortgage industry, there are two main compensation models for loan originators (mortgage brokers or loan officers): borrower-paid compensation and lender-paid compensation. The key differences between these two models are:
- Borrower-Paid Compensation:
- In this model, the loan originator’s compensation (commission or fees) is paid directly by the borrower.
- The borrower typically pays an origination fee, which is disclosed upfront and can be negotiated.
- The loan originator’s interests are aligned with the borrower’s, as they aim to find the best loan terms and rates to keep the borrower’s costs low.
- Borrowers have more transparency into the originator’s compensation, as it is a line item on the loan estimate and closing disclosure.
- Lender-Paid Compensation:
- In this model, the lender pays the loan originator’s compensation, often through a higher interest rate or rebate pricing.
- The borrower does not pay the originator directly, but the compensation is built into the overall cost of the loan.
- The lender may offer different compensation levels (higher or lower) to the originator, depending on the interest rate and pricing of the loan.
- Borrowers may not have direct visibility into the originator’s compensation amount, as it is not a separate line item on disclosures.
Here are some key points about each compensation model:
Borrower-Paid Compensation:
- Provides transparency for the borrower about the originator’s fees.
- Allows the borrower to negotiate the compensation amount.
- May incentivize the originator to find the best loan terms for the borrower.
Lender-Paid Compensation:
- The originator’s compensation is built into the overall loan costs (interest rate, fees).
- Borrowers may not know the exact compensation amount paid to the originator.
- There is a potential for conflicts of interest, as originators may be incentivized to steer borrowers toward lenders offering higher compensation.
Both models are legal and widely used in the industry, but there have been efforts to increase transparency and prevent potential conflicts of interest, particularly in the lender-paid compensation model.
Ultimately, borrowers should understand the compensation model used by their loan originator and how it may impact the overall costs and terms of their mortgage loan.
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This reply was modified 8 months, 1 week ago by
Gustan.
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Borrower-paid versus lender-paid compensation in mortgage loans refers to how the costs associated with obtaining a mortgage are paid.
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Borrower-Paid Compensation: In this arrangement, the borrower pays the fees associated with obtaining the mortgage, such as origination fees, discount points, and certain closing costs. These costs can either be paid upfront at closing or rolled into the loan amount, increasing the overall principal balance. Borrower-paid compensation is a common structure where the borrower takes on the responsibility of covering the expenses associated with securing the loan.
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Lender-Paid Compensation: In this scenario, the lender covers some or all of the borrower’s closing costs and fees in exchange for a higher interest rate on the loan. This means that the lender effectively pays the upfront costs associated with originating the mortgage in exchange for the borrower agreeing to a slightly higher interest rate over the life of the loan. Lender-paid compensation can be beneficial for borrowers who want to minimize their upfront expenses but may end up paying more in interest over time.
The choice between borrower-paid and lender-paid compensation depends on the preferences and financial situation of the borrower, as well as the terms offered by the lender. Borrowers should carefully evaluate the options and consider factors such as the length of time they plan to stay in the home, their ability to pay upfront costs, and their overall financial goals.
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