Getting a mortgage is likely one of the largest financial transactions you’ll make. And behind every mortgage is a lender looking to profit. But how exactly do mortgage lenders make money from your home loan?
In this comprehensive guide, we’ll break down the typical profits mortgage lenders make per loan. We’ll look at the various fees, commissions, and other income streams that allow lenders to generate revenue.
Understanding how lenders make money can help you shop for the best loan and potentially save thousands. So let’s dive into the ways lenders get paid.
Overview of Mortgage Lender Profits
Mortgage lenders large and small are in the business to make money Here are some of the key ways they generate income from each loan
- Upfront fees paid at closing like origination fees
- Ongoing interest payments over the life of the loan
- Commissions and bonuses based on volume and performance
- Reselling loans to investors through mortgage-backed securities
- Potential loan servicing fees if they retain servicing rights
The exact profit per loan will vary greatly based on the lender, market conditions, and loan specifics. But by looking at common income sources, we can estimate potential earnings.
Upfront Fees on Each Mortgage
One way lenders make money on every loan is by charging fees that are paid at closing Here are some common upfront fees
Origination Fee: Usually 1% to 2% of the total loan amount. On a $250,000 mortgage that’s $2,500 to $5,000.
Application Fee: Can range from $0 to $500+ depending on the lender.
Underwriting Fee: Typically around $1,000 but can vary.
Processing Fee: Usually a few hundred dollars per loan.
Appraisal Fee: $350 to $600 in most cases. The lender charges this even if they don’t cover the appraisal cost.
Based on typical fees, a lender may make $3,000 to $8,000 upfront per loan in fees. Of course, some lenders offer no-fee mortgages to win business. But most charge at least some upfront costs that boost income.
Ongoing Interest on Mortgages
In addition to upfront fees, lenders earn continual revenue from the interest you pay on the loan. They profit from the spread between what they pay for money and what you pay.
For example, say a lender gets a mortgage rate from an investor at 4% but charges you 5%. That 1% spread is pure profit they earn over the life of the loan.
On a $250,000 mortgage over 30 years, a 1% spread equals over $60,000 in revenue. The longer you keep the loan, the more interest income the lender earns.
Commission and Bonuses
Many mortgage lenders compensate loan officers through commissions and performance bonuses. This incentivizes them to close more and bigger loans.
Commissions are usually around 0.5% to 2% of the mortgage amount. On a $250,000 loan that’s $1,250 to $5,000. Some lenders pay bonuses for closing a certain volume too.
Top producing loan officers can make $100,000 or more per year in commissions. Closing more loans directly improves their bottom line.
Reselling Loans for Profits
Most lenders end up selling loans to big investors as mortgage-backed securities. The lender generates profit by selling the loans for a higher price than they funded them for.
Lenders can earn profits of 0.25% to 1% or more on the resale. So on a $250,000 mortgage they make $625 to $2,500 selling it to investors.
Selling the loans replenishes capital to fund new mortgages too. This keeps profitable lending volume high.
Potential Loan Servicing Income
When mortgages are sold as securities, the lender can retain the right to service the loan. This means collecting payments and handling tasks for a servicing fee.
Servicing fees are around 0.25% of the outstanding loan balance annually. On a $250,000 mortgage that’s $625 per year in servicing income.
Many lenders sell off servicing rights too. But those who keep them earn recurring profits from their closed loans.
Total Potential Profit Per Mortgage
Based on the typical income streams discussed, here is an estimate of total potential profit on a $250,000 mortgage:
- Upfront Fees at Closing: $4,000
- Interest Rate Spread: $60,000+ over life of loan
- Commission on $250,000 Loan: $2,500
- Resale Profit on $250,000: $1,250
- Annual Servicing Fee: $625
This shows lenders can make $5,000 or more upfront and tens of thousands over time from each closed mortgage. Billions in profits are made on mortgages annually.
Ways Lenders May Discount Fees
Lenders don’t always maximize profits, however. In competitive markets they may offer discounts like:
- Lower or no origination/application fees
- Waiving appraisal or other fees
- Reducing commissions for their loan officers
- Minimizing resale profits to offer better rates
Many lenders will negotiate fees, so be sure to shop around. Discount lenders like online ones can offer big savings on typical lender profits.
How Profits Compare at Mortgage Lenders
All lenders want to profit from mortgages, but models can vary:
Big banks: May have higher overhead and less flexibility on fees. But make up for it with volume and healthier interest rate spreads.
Online lenders: Offer lower rates and fees due to less overhead. Volume and automation boost slimmer profits on each loan.
Credit unions: Since they are non-profits, they can minimize fees and spreads while still covering costs. Great for discount loans.
Mortgage brokers: Don’t fund loans themselves but connect borrowers with lenders for a fee. Earn commissions facilitating transactions.
Correspondent lenders: Work on smaller scale to fund mortgages directly. Keep servicing rights and earn ongoing income from retained loans.
The lender model influences how they profit off each loan. But in the end, every lender seeks to earn money from originating mortgages.
Ways to Save on Lender Profits
Because lenders build in profits upfront and over time, you should take steps to reduce costs:
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Shop around with multiple lenders to compare fees and rates
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Ask lenders to match or beat competitor loan estimates
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Negotiate fees like origination and appraisal costs
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Seek lenders offering minimal commissions to loan officers
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Before closing, ask if lender will sell servicing rights to waive fees
Taking these steps saves thousands over the life of your mortgage by minimizing lender profits.
The Bottom Line
Mortgage lenders have a variety of ways to generate revenue from the loans they originate. This includes upfront fees at closing, ongoing interest payments, commissions, and more. While profits vary, lenders may earn upwards of $5,000 per loan or more over time.
By shopping around and negotiating, you can reduce costs and keep more money in your pocket rather than padding lender profits. But understand that lenders will always build in ways to earn income in order to stay profitable and in business. The key is to find one that balances service, rates, and costs.
How Much Do Mortgage Lenders Make From Your Loan?
One thing most consumers can agree on is that mortgages are not cheap.
The typical origination fee, one percent of the balance, can come to thousands of dollars.
There may be risk-based surcharges for those with low credit scores, small down payments, or riskier properties like high-rise condos or manufactured homes.
In addition, there are usually expenses for third party services like home appraisals, title insurance, escrow officers and home inspection.
If you feel as though everyone is making a ton of money from your home purchase or refinance, it’s understandable.
But not necessarily true.
The slew of new mortgage regulations and consumer protections, while generally regarded as a positive thing for the industry, did increase lender costs. Banks, brokerages and non-bank originators implemented new procedures and hired more personnel to comply with new rules.
Debra Still, President of Pulte Mortgage, claimed in a recent presentation that in 2006, the average loan file had 302 pages. Now, the average mortgage file (book?) is 806 pages.
This caused the cost of originating a new home loan to increase by an average of $210, upping the total cost to over $7,700 per mortgage.
By the end of 2015, dealing with increased regulation, personnel costs, and loan buy-backs (foreclosures, etc.) had dropped lenders’ per-loan profit, according to the Mortgage Bankers Association (MBA), to $493 per loan.
However, as lenders got better at dealing with the new rules, and brought in new technology, costs came down again and profits rose — to an average of $1,686 per loan in the second quarter of 2016.
There is definitely money on the table when you shop for a home loan. But that money is under the lender’s control, not the loan agent’s.
According to the US Bureau of Labor Statistics (BLS), the median pay in 2015 for loan officers of all kinds — commercial, consumer, and mortgage — was $63,430 per year. The lowest ten percent earned less than $32,870, and the highest ten percent earned more than $130,630.
Loan agent compensation varies widely. Some receive a flat salary, but most are paid on commission. The poll results below from Inside Mortgage Finance show the range of commissions paid. Each basis point is 1/100th of one percent, so 25 basis points, or bps, equals 1/4 of one percent. That’s $250 for a $100,000 mortgage.
Most mortgage loan professionals work on commission. That means they may spend hours to work through loan scenarios for you, help you improve your credit score, pull your needed documentation together, complete your application, order title reports and verify your employment, assets and other pertinent details.
They don’t usually get paid if you decide not to buy or refinance, or the application is denied, or you change lenders. Working for free is a big part of this business.
Commissions vary between banks, brokerages and originators. What’s not allowed, however, is that the commission for your loan depend on the terms of the mortgage — no bonuses for giving you a higher rate, or bigger fee, and no penalties for cutting you a discount.
If loan agents want your business, they will offer you the best deal allowed by their employer – the mortgage bank or brokerage.
How To Negotiate The Best Mortgage Rate
When you shop for a home loan, compare offers from different competing lenders. There isn’t usually much to be gained by working over an individual loan officer and trying to beat a better deal out of him or her.
However, lenders are rarely allowed to reduce your fees slightly (“deviate,” as they say in the industry) under certain conditions. They may be allowed to do so in order to compete with another lender’s pricing, if they have a policy in place that meets guidelines established by the Consumer Financial Protection Bureau.
Second, any discount can’t be taken from the loan officer commission, except “to defray certain unexpected increases in estimated settlement costs.”
Fortunately, these days it’s easy to get a fistful of quotes online without putting on your boxing gloves.
Revealed: How Lenders Profit from Loans
FAQ
What percentage does a lender get?
How does a lender make money?
How much money can lenders make?
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Annual Salary
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Monthly Pay
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Top Earners
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$44,904
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$3,742
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75th Percentile
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$43,900
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$3,658
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Average
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$39,501
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$3,291
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25th Percentile
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$41,000
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$3,416
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How profitable is mortgage lending?
How do mortgage lenders make money?
Mortgage lenders can make money in a variety of ways, including origination fees, yield spread premiums, discount points, closing costs, mortgage-backed securities (MBS), and loan servicing. Closing costs fees that lenders may make money from include application, processing, underwriting, loan lock, and other fees.
How much does a loan officer make?
They will pay the loan officer a base salary and a small bonus amount based on the loan amount, not the total fees on a file. Or, simply put — if a loan officer helps you with your mortgage and your loan amount is $200,000 and the loan officer is paid ’30 bps’, the loan officer would make 30 basis points on $200,000 or $600.
How much do mortgage loan professionals get paid?
Some receive a flat salary, but most are paid on commission. The poll results below from Inside Mortgage Finance show the range of commissions paid. Each basis point is 1/100th of one percent, so 25 basis points, or bps, equals 1/4 of one percent. That’s $250 for a $100,000 mortgage. Most mortgage loan professionals work on commission.
How much does a mortgage loan cost?
They operate independently and must be licensed. They charge a fee for their service, which is paid by either you, the borrower, or the lender. The fee is a small percentage of the loan amount, generally between 1% and 2%. If you pay this fee, the dollar amount can be either added to the loan or paid upfront.