Hey there, future homeowner!
If you’re diving into the homebuying process for the first time, you’re probably finding that mortgage terminology can be a bit confusing, almost like learning a new language.
One common topic for first-time homebuyers is the difference between borrower paid compensation and lender paid compensation. This updated guide for 2025 will help you understand everything you need to know.
Don’t worry – we’ve helped hundreds of first-time homebuyers through this process, so we’ll break everything down into plain English. Understanding the difference between the two could potentially save you thousands of dollars in your home purchase, so join the Ben Lalez team and let’s start learning!
What Are The Two Compensation Models?
When you work with a mortgage broker, they need to get paid somehow. There are two main ways that this happens.
Borrower Paid Compensation (BPC): Like it sounds, you (the borrower) pay the mortgage broker’s fee directly.
Lender Paid Compensation (LPC): The lender pays your mortgage broker’s commission, but (and this is important) this cost ultimately gets passed to you through a slightly higher interest rate on your mortgage.
The Important Differences Between Borrower Paid & Lender Paid
Borrow Paid Compensation
Here are the pros:
- Usually a lower interest rate over the life of your loan
- You know the fee upfront and it’s clearly disclosed on your loan estimate
- Potentially lower total loan over time, especially if you’ll keep the mortgage for many years
- More flexibility in negotiating the mortgage broker’s fee
Here are the cons:
- Increases your closing costs (you need more cash available)
- Can feel like another financial burden when you’re already scrambling to pay your downpayment and other closing costs
Lender Paid Compensation
Here are the pros:
- Less upfront closing costs (especially if you’re tight on cash)
- Simplifies your closing disclosure (the fee is built into your rate)
- May qualify for certain lender credits toward closing costs
- Could be tax-deductible as part of your mortgage interest (make sure to speak to your tax advisor about this one)
Here are the cons:
- A higher interest rate for the entire loan term
- You’ll pay more over the life of the loan (sometimes a lot more)
- Less transparent about exactly what you’re paying the broker
- Compensation rates are often fixed and less negotiable
Calculating The Difference
Let’s do a simple calculation to understand the math. We’ll pretend we’re getting a $300,000 loan in Chicago.
With Borrower Paid Compensation:
✓ Interest rate: 6.25%
✓ Broker fee: $3,000 paid at closing
✓ Monthly payments: $1,847
✓ Total paid over 30 years: $664,920
With Lender Paid Compensation:
✓ Interest Rate: 6.50% (0.25% higher to cover the broker fee)
✓ Broker fee: $0 at closing (but it’s still built into your loan)
✓ Monthly payments: $1,896 ($49 more per month)
✓ Total paid over 30 years: $682,560
You’d save $17,640 over the life of the loan with borrower paid compensation, but you’d need $3,000 more at closing.
Timelines Are An Important Criteria
One important question you must ask yourself is: How long do you plan to stay in the home or keep this mortgage?
If you’re planning to stay in your home less than 5 years or think you’ll refinance soon, lender paid compensation might make more sense because you’ll save on upfront costs and won’t pay the higher rate for the full 30 years.
If you’re buying your ‘forever home’ or plan to stay put for many years, borrower paid compensation could save you thousands over the life of the loan.
How To Speak With Your Mortgage Broker About Compensation
As a first-time homebuyer, you might be uncomfortable discussing fees, but it’s your right to understand exactly what you’re paying for. Here’s a quick guide to handling the conversation:
- Start early – Ask about compensation structures during your initial meeting
- Be direct but polite – Say something like “I’d like to understand both borrower paid and lender paid compensation. Can you tell me the differences for my specific situation?”
- Request written comparisons – “Could I see a side-by-side comparison of both options with the total costs over 5, 15, and 30 years?”
- Confirm all fees – “Aside from your compensation, are there any other fees I should know about with either option?”
A good mortgage broker won’t be defensive about these questions and will be happy to explain both options. If they seem reluctant to provide clear answers, that’s a red flag and you might want to look elsewhere.
Common Questions First-Time Homebuyers Ask
Can I negotiate the broker’s fee?
If you choose to go with borrower paid compensation, you can absolutely try to negotiate. Many brokers have flexibility in their fee structure, especially straightforward loans. With lender paid compensation, the rates are often fixed by agreements with the lenders.
Does this affect my qualifying amount for a mortgage?
With borrower paid compensation, the fee isn’t included in your debt-to-income calculations. With lender paid, the higher interest rate means higher monthly payments, which could affect how much you qualify for.
How do I know what the broker’s compensation actually is?
For borrower paid, it will be clearly listed on your loan estimate as an origination charge. For lender paid, you can ask directly. For example, “What percentage is your compensation, and how does this affect my interest rate?”
If I choose LPC, can I get a better rate by shopping around?
100%! Different brokers have different compensation agreements with lenders, so shop around to find a broker who takes a lower commission. Don’t forget, there are more factors than just compensation that are important when choosing a lender to work with.
Important Terms To Know
Yield Spread Premium (YSP): The payment lenders make to brokers for originating loans at higher-than-market interest rates. This is basically how lender-paid compensation works.
Origination Fee versus Discount Points: An origination fee is what you pay the lender for processing your loan (this is different than the broker compensation). Discount points are fees you pay to lower your interest rate.
Lender Credits: Money the lender provides toward closing costs in exchange for a higher interest rate. This is different from, but related to, lender paid compensation.
APR versus Interest Rate: Your interest rate is what you pay monthly, while Annual Percentage Rate (APR) includes your interest rate plus other loan costs, including origination fee. APR is useful for comparing loans with different fee structures.
Current Regulations You Should Know
Since the mortgage crisis, broker compensation has been heavily regulated, and requires the following:
- Mortgage brokers can’t be paid based on loan terms (other than the loan amount)
- Your loan estimate must clearly disclose all compensation
- Brokers can’t receive compensation from both you and the lender on the same transaction
- Compensation must be consistent across similar loan types
These protections ensure that brokers can’t steer you toward loans that make them more money and cost you more.
How To Calculate Your Own Break-Even Point
Here’s a simple way to figure out when borrower paid becomes better than lender paid:
Borrow Paid Fee ÷ Monthly Payment Difference = Break-Even in Months
Using our example:
- Borrower paid fee: $3,000
- Monthly payment difference: $49
- Break-even: $3,000 ÷ $49 = 61 months (about 5 years)
If you keep the loan longer than the break-even period, borrower paid compensation likely makes more sense. If your timeline is shorter, choosing lender paid compensation would be the way to go.
2024 versus 2025: What’s Changed?
The lending landscape has changed a bit between 2024 and 2025, and here’s what you need to know:
Transparency Requirements
- New federal regulations in 2025 have increased disclosure requirements for mortgage brokers
- This means you’ll get clearer information about compensation regardless of which option you choose
Chicago-Specific Considerations
- Some Chicago lenders have introduced special first-time buyer programs in 2025 that provide lender credits toward closing costs when using LPC
- There are a number of home buyer programs available to Chicago home buyers.
Hidden Advantages In Chicago’s Market
Buying in Chicago means you should keep these things in mind:
The Cook County Down Payment Assistance Pilot Program (introduced in 2024) provides up to $25,000 for eligible buyers, which can help cover your borrower paid compensation and still leave funds for other closing costs.
First-time homebuyers in certain Chicago neighborhoods have access to special mortgage programs with reduced fees, making borrow paid compensation for affordable
Several Chicago lenders offer hybrid compensation models in 2025 that share the compensation between borrower and lender, giving you a middle-ground option.
Final Thoughts
There’s no universal right choice between borrower paid and lender paid compensation. The best option really depends on your own circumstances.
What matters most is that you understand what you’re paying, how you’re paying it, and that you make an informed decision that’s best for your family’s situation.
Ready to take the next step in your home buying journey? We’d love to connect you with trusted mortgage professionals who can walk you through both options and help you make the choice that’s right for you!
Have questions? Don’t hesitate to reach out to the Ben Lalez Team. We’re here to make every part of the home buying process easier!
