Knowing the differences between Borrower Paid Compensation (BPC) and Lender Paid Compensation (LPC) is absolutely vital, whether you’re a loan originator trying to set affordable lender credit rates or a first-time home buyer looking for a qualified mortgage that doesn’t break the bank.
See our mortgage 101 explanation guide if you’re new to the home buying market, and let’s examine the pros and cons of borrower-paid vs lender-paid compensation!
“Most people don’t have $400k to spend on a new home…”
— Randy Weber
Lender Paid Compensation (LPC)
Lender Paid Compensation, also known as LPC or lender paid comp is when the lender pays the loan originator, mortgage broker, or loan officer directly for their services in securing a home loan for you.
This means the person taking out a loan through lender paid compensation doesn’t have to pay origination fees or certain other miscellaneous fees at closing, and instead pays a slightly higher interest rate known as a yield spread premium or lender credit on their mortgage.
Here’s how lender paid compensation works:
- Lender Pays Broker: In LPC arrangements, the lender compensates the mortgage broker or loan officer for their role in originating your mortgage. This compensation is typically a percentage of the loan amount, known as a commission, and is usually paid as a one-time fee.
- No Direct Cost to the Borrower: Since the lender is covering the compensation of the broker, there are no direct fees or costs associated with LPC for the borrower. The borrower does not pay any additional upfront charges related to the broker’s services.
- Pricing Flexibility: With LPC, borrowers may have more flexibility in choosing loan products because the compensation structure is separate from the interest rate or loan terms. This means you can focus on finding the loan that best suits your needs without worrying about upfront broker fees.
Borrower Paid Compensation (BPC)
Borrower Paid Compensation, also known as BPC or borrower paid comp, is when the borrower directly pays the loan originator for their services in securing a home loan.
This typically means paying through loan origination points or a loan origination fee, and involves higher upfront costs in return for a lower interest rate on their mortgage.
Here’s how borrower paid compensation differs from lender paid compensation:
- Borrower Covers Costs: In BPC arrangements, the borrower is responsible for compensating the mortgage broker or loan officer for their services. This compensation is typically a fee that can be a percentage of the loan amount or a flat fee.
- Upfront Costs for Borrower: Unlike LPC, BPC involves upfront costs for the borrower. These costs may vary depending on the broker’s fee structure, but they can include application fees, origination fees, or points paid at closing.
- Potential Impact on Interest Rate: In some cases, choosing BPC may allow borrowers to negotiate a lower interest rate on their mortgage, as the broker’s compensation is separated from the loan terms. However, it’s essential to weigh this potential interest rate reduction against the upfront costs.
Choosing Between Borrower Paid or Lender Paid Compensation
The decision between Lender Paid and Borrower Paid compensation ultimately depends on your specific financial situation and preferences. Here are some factors to consider when making your choice:
- Upfront Costs: If you prefer to minimize upfront costs and are willing to potentially accept a slightly higher interest rate, LPC might be a suitable option.
- Interest Rate Priority: If securing the lowest possible interest rate is your top priority, BPC may allow you to negotiate a lower rate in exchange for upfront compensation to the broker.
- Broker Selection: Regardless of the compensation structure, it’s crucial to choose a reputable and experienced mortgage broker or loan officer who can help you navigate the mortgage process effectively.
- Loan Terms: Consider the terms of the loan, including the interest rate, loan duration, lender credit, and origination fees, other miscellaneous fees when deciding between LPC or BPC.
Borrower paid vs. lender paid compensation chart courtesy of Findwholesalelenders.com
Pros and Cons of Lender Paid Compensation (LPC):
Pros of Lender Paid Compensation:
- Lower Upfront Costs: One of the most significant advantages of LPC is that it typically involves lower upfront costs for the borrower. Since the lender covers the compensation of the mortgage broker or loan officer, borrowers do not have to pay additional fees at the outset of the mortgage process.
- Potential for Simplified Pricing: LPC can simplify the loan pricing process for borrowers. The compensation structure is separate from the interest rate and loan terms, allowing borrowers to focus on finding the right loan product without the added complexity of upfront broker fees.
- Negotiation Flexibility: LPC may provide borrowers with more flexibility to negotiate other aspects of their mortgage, such as interest rates and loan terms, as the broker’s compensation is predetermined and does not depend on these factors.
Cons of Lender Paid Compensation:
- Potentially Higher Interest Rates: To cover the cost of compensating the broker, lenders may offer slightly higher interest rates on mortgages with LPC. Borrowers should carefully evaluate whether the lower upfront costs outweigh the long-term impact of a potentially higher interest rate.
- Limited Broker Choice: Some borrowers may find that lenders offering LPC have limited options when it comes to choosing a mortgage broker or loan officer. This can restrict their ability to work with a preferred professional.
- Less Transparent Fees: In LPC arrangements, the borrower may not see the specific compensation paid to the broker, which can make it challenging to assess the fairness of the compensation structure.
Pros and Cons of Borrower Paid Compensation (BPC):
Pros of Borrower Paid Compensation:
- Potential for Lower Interest Rates: BPC allows borrowers to negotiate directly with the mortgage broker or loan officer for compensation. This negotiation may lead to lower interest rates in exchange for upfront fees, potentially saving borrowers money over the life of the loan.
- More Broker Choices: With BPC, borrowers have the flexibility to choose from a broader pool of mortgage brokers or loan officers, potentially finding one that aligns better with their needs and preferences.
- Transparent Fees: BPC provides transparency in terms of compensation. Borrowers can clearly see the fees associated with the broker’s services, making it easier to assess the cost of obtaining a mortgage.
Cons of Borrower Paid Compensation:
- Higher Upfront Costs: The primary drawback of BPC is the higher upfront costs it entails. Borrowers must be prepared to pay application fees, origination fees, or points at closing, which can add to the overall cost of obtaining a mortgage.
- Complex Pricing: BPC may introduce complexity into the pricing of the mortgage. Negotiating compensation separately from interest rates and loan terms can be challenging, and borrowers need to carefully consider the trade-offs.
- Potential for Overpayment: If borrowers do not effectively negotiate compensation with the broker, they can end up paying higher fees without securing a significantly lower interest rate. Checking your interest rates against market standards is crucial to avoid overpayment on your mortgage.
Lender Paid Compensation (LPC) and Borrower Paid Compensation (BPC) each have their advantages and disadvantages for those looking to get a mortgage. Lender-paid compensation offers a fast and straightforward pricing structure, while borrower-paid compensation provides home buyers with a lower interest rate and more options to save money when buying their first home.
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Sources
https://www.benlalez.com/blog-posts/chicago-closing-costs-guide-2024
https://www.benlalez.com/blog-posts/chicago-2024-cost-of-living-analysis-and-comparison
https://www.benlalez.com/blog-posts/chicago-first-time-home-buyer-programs-grants-loans-2024-guide
https://www.benlalez.com/blog-posts/5-huge-mistakes-first-time-home-buyers-make-chicago-2024
https://www.benlalez.com/blog-posts/best-chicago-mortgage-lenders-for-first-time-home-buyers-in-2024
https://youtu.be/NhAUcsK9V68?si=mVi9oYEozWwuz0PT
