FHA Yield Spread Premium

Jim, your loan amount is $60,808 on this amount your lender is receiving 100.250 or think of it this way 1% loan origination of $608.08 and and a YSP of .250 or $152.02 for a total amount of $760.10.  This is a very fair amount considering your loan size, and the rate charged for no origination fee.  If you are happy with the way your lender handled the transaction, especially considering they openly disclosed to you the 100.25...your should just say Thank You.

louis siqueiros:

Jim, your loan amount is $60,808 on this amount your lender is receiving 100.250 or think of it this way 1% loan origination of $608.08 and and a YSP of .250 or $152.02 for a total amount of $760.10.  This is a very fair amount considering your loan size, and the rate charged for no origination fee.  If you are happy with the way your lender handled the transaction, especially considering they openly disclosed to you the 100.25...your should just say Thank You.

You lost me..

My loan ammount is 110,000.  I'm not sure how you came up the the 60,808.  The 152.02 is refering to the .13 that was on the good faith estimate.

Forgive me interjecting here with a simple question, but If the rate provided from the lender to the broker is a wholesale rate, that means even if going directly to the lender one still cannot get that wholesale rate -  there still will be some sort yield spread for the bank or the broker to profit from.... or can the buyer still get a "wholesale" rate from a lender??

That yeild spread - is it a one time fee kind of thing or is it paid for the duration of the loan?

YSP is a one time payment from the bank to the broker for the "retail rate" the customer receives.  If you want to get a lower rate, what you are calling a "wholesale rate", you may have to pay a small amount of discount points.  The par rate usually pays the broker a small amount of YSP and the next lower rate then usually requires a small amount of dscount points to be paid.

FHA loans are rather unique in that lenders tend to provide incentives (in the form of pricing) to reach certain rates.  Look at the following rate sheet example (anything over 100 is the % of YSP paid, anything under 100 is the amount of discount that has to be paid):

6.5%     100.357          6.375%     99.911          6.25%     99.724          6.125%     99.435          6%     102.602

5.875%     102.087          5.75%     101.725          5.625%     100.995          5.5%     101.104          5.375%     100.250

5.25%     99.757          5.125%     98.892          5%     99.028

So the par rate would be 5.375% but I doubt you normally would get that rate.  Why?  If we gave you that rate, we would make .25% YSP, but if you get a rate just .125% higher (5.5%), we would make 1.104% YSP.  Your payment would be slightly higher, but we would make almost 4x as much.  Does that mean you are not getting a good offer?  Nope.  On that day a local bank was offering 5.75% with the same closing costs as my offer of 5.5%.  So it ends up as a win-win situation. 

Also, notice that if we were to give you 5.625%, we would make less than if we gave you 5.5%.  See how that lender gave us a great incentive to offer 5.5%?

This is a rare glimpse on what we see on a daily basis.

It gets paid to the broker once.

This might be a little bit of oversimplification, but here's the idea:  When a bank decides to set it's retail rate for the day, it takes into account its costs for doing a loan, plus "some for the house" and builds that into the spread over its cost of money.  When it sets its wholesale rate, its costs for doing a loan are somewhat lower.  Thus, those savings get passed along to the broker.  Can a retail loan officer for  Bank X offer a customer a rate which is equal to or lower than the wholesale rate Bank X offers its brokers?  Maybe, but not likely.....