Mortgage brokers buy loans from a bank and sell them to their clients. Every loan has a wholesale or par interest rate. A loan lower than this rate will cost the mortgage broker money, while a loan higher than this rate will earn a commission.

Mortgage brokers make their income by charging fees to the borrower on both the front and the back of a home loan. Non-refundable application fees, processing fees, and loan origination fees are some of the different types of front-end revenue fees. A yield spread premium is a form of back-end compensation in which a lender pays money to a mortgage broker in return for the delivery of a higher interest rate loan. When a borrower agrees to a loan above the wholesale rate, the extra money is profit for the mortgage broker. Mortgage brokers who prepare FHA, VA, and USDA rural loans also receive a service release premium in addition to the yield spread premium.

A mortgage broker collects no interest from a loan because the broker isn't actually lending the money to the client. There are also certain types of fees associated with a home loan that don't make a profit for the mortgage broker. Credit report fees, inspection fees, appraisal fees, title fees, and mortgage insurance are actual costs incurred by every loan.

Loan Fee Disclosure Requirements

Under the Real Estate Settlement Procedures Act, loan fees must be described in a Good Faith Estimate. This document must be given to the borrower within three days of a loan application. It provides an estimate of all lender charges and closing fees.