Commercial Mortgage Broker | When a YSP May Not Be a Problem
When you seek out a commercial mortgage broker, the idea is that you’re willing to put your trust in the hands of a broker that will find the best loan for you. Obviously this comes with risks, and one of the biggest concerns is that the broker may be finding you a worse rate in order to get higher pay from the lenders.
The reality is that this is fairly standard practice. Mortgage brokers are often paid what’s known as a “Yield Spread Premium,” or YSP. This is when the mortgage broker receives financing for getting the borrower to purchase a commercial property for a higher interest rate than the lender would otherwise offer. While it sounds problematic and, in some cases, can affect your profit margins, the reality is that not all YSP’s are necessarily a bad thing.
When a YSP is Acceptable
In general, when you get a loan from a mortgage broker rather than a retail loan, you’re doing so because you want to both find the best rate and save money on fees. Often the fees for creating these loans are passed onto the lender. But for both the lender and the broker to profit, the fees have to be paid from somewhere, and in many cases they are paid through a higher interest rate.
By law, mortgage brokers are required to state the YSP that they have on the loan. You can then use those numbers to decide if the YSP is worth saving money on fees. In some cases it may be. In the following scenarios, a YSP may not be a problem at all:
- If you don’t have enough money for fees or want to save money.
- If you plan to sell the property within a few years, before the APR costs outweigh the savings.
- If you are positive you can handle a larger payment monthly but unable to pay a significant amount up front.
Keep in mind that in some cases the YSP may actually be less than you save in fees, and the starting interest rate before the YSP may have been lower than you could have received on your own. All of these are reasons that a commercial mortgage broker may still be valuable, and a YSP may not be a deal breaker.
Before you get any property or work with any broker, however, it’s still crucial that you shop around. Find out more about starting loans and get connected to those that will help you fund your next investment by signing up with CRE Lender today.
[salesforce form=”2″]