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Whether you're taking a loan yourself or maybe considering this as a profession, the question of a loan officer's income may be on your mind. After all, if you're taking a loan or a mortgage, how your loan officer gets paid may affect their recommendations. And if you're just out there scouring the web for career opportunities, then how much and how exactly this line of work can make you money is certainly an important question. Read on as we bring you solid referenced information on this very topic.
Consumers have a healthy skepticism of “free” services. You may not be paying your buying realtor, insurance agent, financial planner, or loan officer out of pocket … but you know they are not working for you out of the goodness of their heart. Someone must be paying them, somehow. Who is paying them? Is that their real customer? Will it influence the advice they give you or the products they steer you to?
The loyalties of loan officers are particularly mysterious. They may work for a bank or brokerage, but may also be the “house lender” for a realty office. They may source loans from a variety of different institutions. What master does the loan officer really serve?
Understanding how your loan officer gets paid is critical to getting the best deal on a new loan.
What Does a Loan Officer Do?
The job description of a loan officer is to serve as the public face of a lending institution like a bank or loan broker. He or she presents loan terms to the customer, screens them for creditworthiness, and, if appropriate, sends the customer to underwriting.
They may pre-qualify a borrower before a “hard inquiry” is performed on the customer’s credit, which temporarily lowers their credit score whether the loan is approved or not.
Loan officers must be trained and certified, but do not require formal schooling despite a high median income of $64,430 as of 2015. Hence, the job's longstanding public allure.
Do Loan Officers Get Paid a Salary?
The short answer is “no” — or, at least, very rarely. Loan officers typically get paid on commission, collecting some percentage on the closed transaction. These commissions may be “lender-paid” or “borrower-paid.” Usually, it’s the former. It is never both.
Loan officers who work for a brokerage might receive a percentage — for example, 50%-80% — of the revenue generated for the brokerage by the transaction. These could be revenues “on the front,” i.e. fees and charges you can see in advance. Examples include origination fees (typically 1% of the loan balance), processing fees, and other miscellaneous charges.
Other revenue paid to the brokerage may be “on the back” — that is, fees you don’t see in advance, but which still may come out of your pocket. The most notorious example of this is the “yield spread premium” (YSP).
The YSP lives in the interest rate of the loan. It is the difference between the interest you pay, and the interest that goes to the bank. Yes, you may be overpaying on interest, and the extra money goes to the brokerage, not the bank.
Laws passed in 1999 required YSP to be “reasonably related” to the services offered by the brokerage, but who’s to say what is “reasonable?” The YSP is not required to be revealed until the HUD-1 closing statement is drafted — i.e. when the process is too far along to be easily stopped.
A loan officer for an FDIC-insured bank may receive a base salary plus a smaller percentage of the closed loan balance. This percentage is usually measured in “basis points” or “bps,” sometimes pronounced “bips.” A “basis point” or “bip” is financial jargon for one-hundredth of one percent or 0.01%.
If a loan officer is compensated at “30 bps,” he or she pockets 0.3% of the total loan balance. On a 300,000 mortgage, the commission adds up to $900.
When meeting with a loan officer, questions you might ask include:
- “Are your fees lender-paid or borrower-paid?”
- “What revenue do you take on the front? On the back?”
- “Is there a yield spread premium on this loan? What is it?”
- “Do you take a commission on the total balance of the loan?” (Be prepared for an answer in the number of “bips.”)
How Much Does a Loan Officer Make per Transaction?
Broadly speaking, a brokerage will receive between 0.5% and 2.75% of the loan balance as revenue, and the loan officer will receive some portion of that.
After the 2008 Financial Crisis, subprime lenders and their shady loan officers drew a lot of heat. In the wake of new financial regulations following the crisis, loan officers’ compensation per closed loan bottomed out at $493 at the end of 2015.
As the industry adapted to the new regulations, those numbers shot back up. By the second quarter of 2016, loan officers were making an average of $1,686 per closed transaction.
How many loans does the average loan officer close?
That last figure begs another question — how many transactions do loan brokers close per month? Per year?
There’s the simple answer — loan officers close an average of 2.8 loans per month across the industry. Dig into the figures, however, and we see a huge pay gap open up. The top 20% of loan officers originate 57% of the loan volume. The bottom 40% of loan officers originate under 7% of the loan volume.
Break down those numbers, and you find that the top 20% close eight or more transactions per month. For the bottom 40%, that number is less than one loan per month. That income profile may not even break the poverty line.
How much does a loan officer make an hour? Is "loan officer" a sales job?
What tipped you off? Those lopsided production numbers? Yes, like any job that pays on commission, the loan officer role is a sales job.
The loan officer may be the public face of the lending institution. He or she may take seriously the role of screening out unqualified borrowers.
At the end of the day, however, the officer is there to close deals. Otherwise, he or she does not get paid. All the rules of closing a sale apply, including:
- Building rapport
- Finding pain points
- Overcoming objections
- Closing / Asking for the sale
In a perfect world, the loan officer only closes qualified clients into products that meet their needs. After all, no one is happy if an application is denied — least of all the loan officer, who isn’t getting paid.
Still, the chase for those commissions leads to a “can-do” attitude that promises the world. “I can get yo the loan! I can get you the loan! I can definitely get you the loan!” Two days after application: “Sorry, I couldn’t get you the loan.”
Remember, in big-ticket sales, there is little or no limit to how much money a talented salesperson can earn per hour. The deeper the prospect pipeline, the better the closer, the fatter the loan balances, the more money the loan officer takes home.
When meeting with a loan officer, remember — you may be paying more than you have to for that loan. The loan officer may steer you toward products that generate higher commissions.
This is why it pays to shop around. You don't have to use your REALTOR's® "in-house lender." Get recommendations. Look up online reviews. Obtain multiple quotes. Don't be intimidated — your financial future is at stake. Take the time, put in the leg work, and make an informed decision. If the loan officer really is pitching the best deal, he or she will earn your business.