When taking out a mortgage loan, borrowers have the option of working with a mortgage broker or loan officer to help them find the best loan terms and navigate the complex mortgage process. One of the decisions borrowers will need to make is whether to opt for “lender paid compensation” (LPC) or “borrower paid compensation” (BPC) to pay for the services of the broker or loan officer.  One must remember that Borrower Paid Comp is triggered when there has been a substantial change in circumstances with the borrowers.  That being said your mortgage professional can discuss your particular situation.

 Lender Paid Compensation (LPC):

With LPC, the lender pays the broker or loan officer a fee, which can be a percentage of the loan amount or a flat fee, for their work in originating the loan. This fee is typically included in the interest rate or other closing costs paid by the borrower. The purpose of LPC is to incentivize brokers and loan officers to offer loans from a particular lender by compensating them for their work in originating the loan.

One of the advantages of LPC is that the borrower does not need to pay any upfront fees for the services of the broker or loan officer. Instead, the lender pays the broker or loan officer, and the cost is spread out over the life of the loan through the interest rate or other closing costs. Additionally, LPC can be useful for borrowers who are unable or unwilling to pay upfront fees, as it allows them to secure the services of a broker or loan officer without incurring any out-of-pocket costs.

However, there are also potential downsides to LPC. Brokers and loan officers who are paid through LPC may have an incentive to steer borrowers towards loans with higher interest rates in order to receive a higher commission. This can lead to conflicts of interest and may result in borrowers paying more in interest over the life of the loan.  One has to remember is to make sure you are being presented with the lowest interest rate available allowing you to choose which rate is best for your circumstances.

Borrower Paid Compensation (BPC):

With BPC, the borrower pays a fee, which can be a percentage of the loan amount or a flat fee, to the mortgage broker or loan officer for their services in helping to secure the loan. This fee is typically included in the closing costs paid by the borrower. The purpose of BPC is to compensate brokers and loan officers for their work in originating the loan, and it can be negotiated between the borrower and the broker or loan officer.  A substantial change in circumstances are required and in some cases BPC is not allowed under some circumstances.

One of the advantages of BPC is that it can provide borrowers with more transparency about the cost of obtaining a mortgage loan. Because the borrower is paying the fee directly, they can see exactly how much they are paying for the services of the broker or loan officer. Additionally, because the fee is negotiated between the borrower and the broker or loan officer, borrowers may be able to negotiate a lower fee or shop around for a better rate.

However, one potential disadvantage of BPC is that it can create an upfront cost for borrowers.

This can be a significant barrier for some borrowers, particularly those who are already struggling to make a down payment or pay other closing costs. Additionally, because the fee is paid upfront, borrowers may be less likely to switch brokers or loan officers if they are not satisfied with the services provided.

Which Option is Right for You?

Whether LPC or BPC is the right choice for a particular borrower depends on a variety of factors, including the borrower’s financial situation, changed circumstances of the borrower, the lender and broker or loan officer involved, and the terms of the loan. Ultimately, the most important thing is for borrowers to fully understand all the costs associated with a mortgage loan, including any LPC or BPC, and to shop around for the best loan terms and interest rates.

When working with a mortgage broker or loan officer, borrowers should always ask about compensation and make sure they understand how the broker or loan officer is being paid. By being informed and proactive, borrowers can ensure that they are getting the best possible deal and that they are working with a reputable and trustworthy mortgage professional.