Visio Lending is proud to offer Yield Spread Premium or YSP for its approved brokers. This is not only a huge perk for mortgage brokers --- yield spread premiums also can benefit borrowers. Let's take a closer look.
A yield spread premium is a form of compensation that a mortgage broker receives from the original lender when they sell a borrower an interest rate that exceeds the lender's par rate for which the borrower qualifies. Lenders that work with brokers are called wholesale lenders, as they are providing the mortgage to a third party rather than the consumer.
So, Visio is the original mortgage lender, and the mortgage broker is the intermediary in this definition, but what is the par rate? Think of the par interest rate as the retail interest rate (a lower interest rate) that Visio might charge if no intermediary or broker was involved in the transaction.
We say “might” because mortgage brokers add value to transactions in a variety of ways, such as easing the negotiation process and providing tailored services to borrowers. Thus, many mortgage lenders actually have higher interest rates they charge if they are working directly with a retail customer.
Mortgage 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 the customer has to provide more upfront costs on top of their closing costs on a purchase. 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 retail mortgage rate, the lender agrees to pay the broker compensation in cash at or shortly after the closing.
Therefore, the borrower pays the mortgage broker's compensation in their monthly payment and lowers their upfront costs.
The calculation for yield spread premium (YSP) is as follows:
Yield Spread Premium = (Quoted Interest Rate − Par Interest Rate) x Mortgage Loan Amount
Let’s take a closer look at the process of calculating the yield spread premium. Here are the steps:
For this example, we assume that the par rate, or the baseline rate, is 6% and the quoted interest rate is 6.5%. The loan amount is $250,000.
We subtract the baseline rate from the quoted rate to get 0.5%, which is the yield spread.
Now, we convert the yield spread into a decimal (0.005) and multiply it by the loan amount ($250,000) to get a yield spread premium of $1,250.
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, brokers could charge borrowers 2 points at close with a slightly higher interest rate.
In return for the higher interest rate, the lender pays the broker the last point. The compensation received from this can be quite significant, allowing mortgage brokers and mortgage lenders to profit.
The borrower receives some benefits from this as well, particularly if they would not be otherwise able to qualify for mortgage loans. When borrowers are paying an interest rate higher than the market rate, the mortgage lender may reduce their credit score requirements, aware that they will still make a profit.
Another benefit is that the borrower pays less upfront. YSP can be used to pay the origination fee or other closing costs that may otherwise make securing their loan difficult. Origination fees on commercial loans can be quite high, so yield spread premiums help borrowers manage the costs required at the time of close.
YSP provides borrowers, mortgage lenders, and brokers with negotiation options. Borrowers have the option of using discount points to lower the interest rate if they have the cash upfront, or they can accept the higher interest rate if they don’t have the money.
In addition, lenders can incentivize accepting a more substantial rate on the mortgage loan by issuing negative points. This means that the lender pays the origination fees or offsets prepaid interest, which the borrower will then pay over time through the higher interest.
There’s another important thing to know about YSP. For consumer mortgage transactions, mortgage companies must disclose the yield spread premium on the closing statement.
This generally is not the case for business purpose or commercial loans, which is why it’s important to discuss the yield spread premium with your mortgage broker and ensure that you review contracts carefully.
Through the Visio Broker Program, brokers can charge up to two points yield spread premium and three points on the front end of additional compensation. A Visio mortgage broker receives a designated Account Executive to keep your workload down, as well as tools and resource. Become an Approved Broker today.