If you are in the market for a new mortgage either to purchase your home or refinance an existing loan, you might wonder if a wholesale lender could save you money. Most homeowners in the United States do not understand how the mortgage markets work and are unable to take advantage of wholesale rates even if they contact a wholesale lender directly. Homeowners who learn how the system works are able to take advantage of the wholesale nature of the market and save thousands of dollars. Here are the basics you need to know in order to take advantage of wholesale mortgage rates with your home loan.
Mortgage Market Basics
There are two markets in the United States for mortgage loans. The primary mortgage market is where consumers like you and I take out loans to purchase homes. The secondary market is where institutions and other investors buy and sell mortgage debt for a profit. The primary market is made up of several types of mortgage lenders, most of which make the majority of their profits by selling mortgage debt on the secondary market.
Types of Mortgage Lenders
The basic types of mortgage lenders you will encounter in the primary market include wholesale lenders, banks and credit unions and ”broker-banks” known as correspondent lenders. I don’t recommend taking out a mortgage from your bank, credit union, or a broker-bank such as E-Loan because these lenders are exempt from the Real Estate Settlement Procedures Act thanks to a loophole courtesy of the Banking Lobby. Because these lenders are not legally required to play by the same rules as other mortgage lenders you’ll never know how much they’ve marked up your mortgage interest rate. Besides, why would you want to do business with a lender that isn’t required to play by the rules?
This article is about wholesale mortgage lenders, which now that we’ve eliminated banks and broker-banks are all we’re left with. What are wholesale lenders? Wholesale lenders are institutions that sell loans on the secondary market for a profit. As members of the public, you and I cannot deal with a wholesale lender directly. Even if you were to contact one of these lenders you’ll be dealing with a retail division of that lender and you will not get a wholesale rate. How can you get a wholesale mortgage rate? Glad you asked…
Mortgage Brokers Have Access to Wholesale Rates
If you want to take advantage of wholesale mortgage rates you’ll need to enlist the help of a mortgage broker…and not just any broker, you need to find one willing to work for an origination fee without charging you Yield Spread Premium. Finding a mortgage broker like this is not an easy task. Yield Spread Premium frequently doubles often triples the compensation mortgage brokers receive on your loan.
What is Yield Spread Premium?
Yield Spread Premium is simply the difference between the wholesale rate the lender approves you and the rate your mortgage broker “sells” you. This markup of your mortgage rate is what makes your loan “retail.” Mortgage brokers do this because the wholesale lender pays them a bonus for closing mortgage loans with above market interest rates. In fact your mortgage broker receives a commission of one percent of your mortgage amount for every .25% they con you into overpaying. I use the word “con” because most brokers conveniently omit this markup from your Good Faith Estimate and have ways of cleverly disguising it on the HUD-1 statement.
Many mortgage brokers get defensive, even angry when questioned about Yield Spread Premium. They’ll tell you that because this fee isn’t coming out of your pocket that you shouldn’t worry about it. What you should be concerned about is the reason that this fee is being paid…your broker gets this commission because you’re agreeing to pay an above market mortgage rate.
This is why finding the right mortgage broker is critical for getting a wholesale mortgage rate. You’ll need to negotiate with potential brokers to pay a reasonable origination fee (not more than one percent) without paying Yield Spread Premium. Start by telling your mortgage broker that you understand how Yield Spread Premium works and will not accept this markup on your loan.
If you’d like to receive more advice about wholesale mortgage lenders and taking out a mortgage without paying too much check out my free Underground Mortgage Videos.