If you are working with a mortgage broker, and we hope you are, you will want to know everything there is to know about yield spread premium (YSP).  What is it and how important is it?

YSP is a ”rebate” that is paid by a wholesale lender to a mortgage brokerage.  It is a source of commission in a loan transaction just like upfront fees such as origination.  It differs from something like an origination point because you don’t pay it to the lender or mortgage brokerage, however, in a sense you do pay for it in the interest rate.  The reason is simple.

The more yield spread premium a mortgage brokerage receives from a wholesale lender, the higher your interest rate is over the “par” or wholesale rate.  Obviously, some YSP paid to a mortgage brokerage is acceptable but you can see how a mortgage company can take advantage of borrowers by charging high interest rates in order to get a bigger “rebate” from the wholesale lender.  Take a look at the example below that shows a wholesale rate and the higher rates that produce YSP.

6.00% (0.00)

6.25% (.500)

6.50% (1.50)

The examples above are quite simple to read.  6% pays nothing in YSP to the mortgage broker.  It is a wholesale rate in our example.  The others pay .5% and 1.5% of the loan amount respectively.  Now, depending on loan size, a difference of .25% in the rate can make quite a substantial impact on the commission the mortgage broker can earn and could also cost you a lot more in interest payments over the life of the loan. 

An acceptable amount of YSP that a broker should receive is at or near 1% of the loan amount.  If your mortgage company is being paid in YSP for originating your loan, you should not be paying very much in upfront origination points if any.  Additionally, if you are receiving a wholesale interest rate and the broker is receiving little to no compensation from the wholesale lender, expect to pay in points.  How else is the mortgage broker supposed to make money for providing their professional service?

YSP should be disclosed on the good faith estimate within 3 days of taking an application.  Additionally, the YSP a mortgage broker earns on your loan will be disclosed on the HUD1 settlement statement that must be signed at closing.