As of this week, Visio Lending is proud to offer Yield Spread Premium or YSP for its approved brokers. What is YSP? Investopedia defines YSP this way: “a form of compensation that a mortgage broker, acting as the intermediary, receives from the original lender for selling an interest rate to a borrower that is above the lender's par rate for which the borrower qualifies.” That is a pretty good definition, but it too, requires a bit of explaining. So Visio is the original lender and the broker is the intermediary in this definition, but what is the par rate? Think of the par rate as the interest rate (a lower interest rate) that Visio might charge if no intermediary or broker was involved in the transaction. I say “might” because brokers add value to transactions in a variety of ways; thus, many lenders actually have higher interest rates they charge if they are working directly with a retail customer.
Brokers usually get paid by receiving “points” on a loan, receiving YSP, or both. Points on a loan are paid in cash at closing. This means that on a purchase, the customer has to provide more cash at closing. On a refinance, points paid in cash at closing usually mean the customer receives less cash-out proceeds. YSP allows the customer to finance part of their broker’s compensation as part of the mortgage loan. The customer agrees to pay a higher interest rate on the loan. In return for that higher interest rate, the lender agrees to pay the broker compensation in cash at or shortly after the closing. The customer doesn’t have to come up with the cash at closing.
So let’s put this all together. Most brokers average 1.5% to 3% in compensation on the loans they originate. It varies by geography, loan type and loan size. So instead of requiring their customer to pay them say 3 points (3%) at close, instead they could have the customer pay them 2 points at close with a slightly higher interest rate. In return for the higher interest rate, the lender will pay the broker the last point.
Something important to know. For consumer mortgage transactions, YSP must be disclosed on the closing statement. This generally is not the case for business purpose or commercial loans.
For the transitional rental investor who is trying to minimize their cash out of pocket, YSP can have a positive impact. For the permanent rental investor and other investors focused on getting the lowest possible rates, Visio Lending has customizable options to keep your rate down.
At Visio Lending, we strive to provide the optionality our borrowers and partners need to thrive. Learn more about Visio Lending’s loan program customization options.