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Ultimately It's the Loan Officer Making the Rate, Not the Lender.

Few mortgage companies tell their loan officers what they must quote throughout the day. Instead, loan officers are given rate sheets that show a "required" rate and point structure that the company will get. Loan officers will then mark up the interest rate, typically by anywhere from 1 to 2 points, or 1/4 to 1/2 percent.

Each morning, the lender sends out its interest rates for the day. These rates are not intended for consumers, but instead are to be used for rate quoting. This time, the rate sheet might look like this:

30-year mortgage

15 day

30 day

60 day

5.00%

2 pts

2.25 pts

2.50 pts

5.125%

1-875

2.125

2-375

5.25%

1.75

2.00

2.25

5-375°/°

1.625

1-875

2.125

5.50%

1.50

1.75

2.00

The loan officer would add the company's profit on top of the points, or otherwise quote a higher rate that did not require points. The loan officer would then split whatever is added on top of the lender's rate sheet.

Some lenders have minimums that the loan officer must quote. For instance, a loan officer must make at least 100 basis points on all loans and perhaps a $300 processing fee. But anything after that is fair game. Quote whatever you have to quote to get the deal.

Conversely, some lenders also set a limit on what a loan officer can charge, say 3 points total. Anything above that amount won't be accepted. In fact, many anti-predatory lending laws in the country stipulate how much can be charged on any particular loan.

Getting an interest-rate quote is a different breed of product. It's time-consuming, it's negotiable, and the consumer really has more influence over the final price of a mortgage than she may be aware of.

In the End, You're Not Negotiating the Rate; You're Negotiating the Loan Officer's Commission.

This is really what it all boils down to. Loan officers get their rates from their secondary department or, in the case of a mortgage broker, from a wholesale lender. At that point, the loan officer marks up the rate to cover the mortgage company's required minimum income on any particular loan, paying close attention to the LLPA.

If a loan officer quotes you 5.50 percent at 1 point and the loan officer splits all the revenue 50/50 with her company, she'll get :/2 point in commission. If there is any YSP, she'll get half of that as well.

Say your loan is for $200,000 and your loan officer is quoting you 5.50 percent at 1 point and 1 YSP. That's $2,000 in points plus $2,000 in YSP, or $4,000. Your loan officer's agreement is to split all revenue on the loan, so she stands to gain $2,000 on your loan, and the company's required revenue is also $2,000. If the loan officer is in a "bidding war" with a competitor, she's likely to reduce your discount point by a little or reduce your rate by 1/8 percent and take less YSP. In this example, you might get 5.375 percent if she took a YSP of $1,000 instead of $2,000. If she does that, she's losing $1,000 in potential income on your loan. Or say there's a $400 processing fee that she can waive. Maybe she'll keep the $2,000 YSP for herself but take out $400 from that to pay your processing fee for you. Her employer still gets its original required income of $2,000, but the rate negotiations are really about the loan officer's income. That's why you can ultimately "hit a wall" in rate negotiations, since at some point the loan officer is making very little, if anything, on a loan. Loan officers are just like other people in that they have to make money to pay their bills. Sometimes it's just not worth it to them to work hard on a loan but make only $300 on it.

 
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