How Much Do Mortgage Brokers Make?
April 9, 2001

"You have written a lot about how borrowers need to protect themselves against hidden charges by mortgage brokers, but you haven’t indicated how much is too much. Do you have any information on how much brokers actually charge?"

A survey taken in 1998 of about 1,000 broker firms found that the average income per loan was \$2443, which was 2.02% of the average loan amount of \$120,744. This is gross income – none of the brokers’ expenses are deducted.

The broker income reported in this survey comes from the payment of points by borrowers, and rebates to brokers by lenders. Since lenders pay rebates only on higher rate loans, the borrower pays them indirectly in the rate. Hence, broker income measures the cost of broker services to the borrower.

A database I recently acquired covering 774 loans brokered in December 2000 and January 2001 provides more detailed information on factors affecting mortgage broker income. The brokers covered are larger firms employing multiple loan officers, and they operate in relatively upscale markets. Their average income per loan was \$3191, which was 2.10% of the average loan of \$152,031.

## Differences in Loan Size

Brokers make more money on large loans than on small ones. I divided the loans into 6 groups sorted by loan amount, and calculated average income per loan for each group. Income rose consistently from one group to the next. For loans of \$80,000 and less, the brokers averaged \$1600 per loan. For loans greater than \$225,000, they averaged \$5453 per loan.

While income in dollars rises with loan size, as a percent of the loan it declines. The ratio of profit to loan amount was 2.53% among the smallest loans, and 1.86% among the largest.

The higher income on large loans is not explained by a greater workload. If anything, smaller loans take more of the broker’s time than larger loans. The database shows the number of days taken to process each loan, which is a rough measure of workload. Loans in the smallest size group took 14.07 days on average to process whereas loans in the largest size group took only 8.86 days.

## Conventional versus FHA

Income per loan was consistently higher on FHA loans than on conventional loans. For example, on loans between \$80,000 and \$110,000, brokers averaged \$3234 on FHAs and \$2093 on conventionals.

The greater workload on FHAs is one factor underlying the higher charge. For example, the average processing time on FHAs between \$80,000 and \$110,000 was 21.22 days, compared to 12.27 days for conventionals. In addition, the brokers tell me that FHA borrowers do not bargain as aggressively as conventional borrowers.

## Overages and Underages

As a way of motivating their loan officer employees, all the brokers record overages and underages on every loan. An overage is income higher than the target income and an underage is income below the target. The loan officer shares overages and underages with the firm, usually 50-50.

For example, if the target income is 1.625% and the loan officer collects 2%, there is an overage of 0.375%. The broker would make the normal commission of 0.5% + half the overage, or 0.6875%. If the loan officer only manages to collect 1.25%, there would be an underage of 0.375% and the loan officer would make only 0.3125%.

Among the 774 loans in the data base, 516 (about two thirds) carried an overage. Only 123 loans, or less than one sixth, carried an underage. The remaining 135 loans came in at the target.

Firms cap the underages that their loan officers can offer, but they may not cap overages. Among the 774 loans, underages ranged up to 1% and overages to 3%. But most were much smaller.

## The Moral

A major reason there are so many more overages than underages is that many borrowers are awed by the process and accept what they are offered.

Overages and underages arise out of a negotiation process. The borrower who doesn’t understand that will almost certainly pay an overage. The borrower who views getting a mortgage as similar to buying a car has the best shot at negotiating a good deal.

If you want neither to haggle or be taken, find an Upfront Mortgage Broker who will set a firm price going in.