In This Chapter

Congratulations! The owner of the mortgage broker firm has offered you a job. You like the boss, your co-workers seem collegial, and the company culture is supportive and energetic. You want to be a mortgage broker and this is a great opportunity. All this sounds terrific, but now let’s get down to the nitty-gritty of the business side of a job.

How often are you going to get paid? How are you going to handle the slow months when the commissions are few and far between? Who’s going to pay for your health insurance? How about your travel expenses? Who picks up the tab for all those donuts you’re bringing to realtor open houses?

This chapter will help you sort out the details of your job before you start so there are no surprises—or disappointments—after you’ve joined the team.

Woody Allen once said: “Money is better than poverty, if only for financial reasons.” So even if you find it awkward to talk about money, you need to have answers to the questions of what are the splits (how much you’ll earn on each deal); when you will be paid (weekly, bi-weekly, monthly); how long after a deal is closed you will get paid; and what kinds of bonuses you can expect at the end of the year. You also need to figure out how to handle your cash flow. Some months will be more lucrative than others—how are you going to deal with the months that are lean?

Although you will work on commission, you are an employee of the company, not an independent contractor. That’s an important distinction for you financially, as well as legally. It will impact how you file your income taxes, what benefits will be offered (health insurance, Social Security taxes, retirement plans). It also protects you legally so that you are covered by the company’s liability insurance.

As we discussed in Chapter 2, you’ll be paid on commission which consists of the origination points, discount points, broker fee, and yield spread premium (the fees paid by a lender to a mortgage broker for the delivery of a loan that carries a higher interest rate; see Chapter 17). The commission is paid to the mortgage broker company at the closing, and your percentage of it will be in your next paycheck.

The more loans you close, and the larger the amounts, the more you earn. It will take time to build up to the point where you always have deals in the pipeline. Your goal is to close between 15 and 20 deals a month.

The size of the loans will depend on the housing market in which you work. If it’s a high-price district, the mortgages will be larger—and you’ll earn a bigger commission. If you work in an area where housing prices are moderate, then you’ll need to increase the number of deals you close in order to up your earnings.

You need to research the housing market in which you’ll be working. Presumably, you did at least a cursory survey before going on the job interview. But you want to discuss the market in detail with the company owner so that you and he both have a reasonable understanding of what you can expect to earn.

Every company has their own method of determining splits (how much of the commission you’ll receive, how much will go to the company). Certainly in those first few months, with no experience, your BPs (basis points, the term used to describe your percentage of the deal; see Chapter 2) will be significantly lower, especially for in-house generated business, maybe a one-third/two-thirds split. Even if you bring in a deal, given the level of supervision you need in that first month, you’ll probably still get a reduced percentage.

Ask the owner …

Many companies, especially for the first couple of months, will give you a draw against your commission. It will be a minimal amount of money, but it should help your cash flow until you start generating and completing your own deals. Remember: The draw is a loan. You’ll have to pay it back out of the commissions you earn.

Ask the owner …

I pay my mortgage brokers a year-end bonus based on the company’s overall profit and their personal performance. Each broker and I set goals for how many deals they will close that year. It’s based on a realistic appreciation of the housing market, as well as their plans for reaching new clients and bringing in business. If it’s a depressed market, then the goals will differ from a period when houses are selling like hotcakes. Bonuses are therefore individualized and vary based on each broker’s own record.

I pay holiday bonuses to staff who don’t work on commission (loan processors, administrative help). I also pay an incentive to the loan processors if they complete more than a certain number of loan files.

Ask the owner …

Managing your cash flow is always a tricky business if your earnings are based on commission. Some months you’re flush, other months are lean. Here are some ways to smooth out the year financially:

No matter what your age, or how healthy you currently are, you need insurance: health, disability, and life insurance. You need to check what kind of coverage your company provides.

I offer health insurance coverage to my employees. Even sharing the premium costs with my staff, the coverage is a huge chunk of my operating budget. Unless you are covered under your partner’s benefits, lack of health insurance coverage should be a deal breaker for you in deciding whether to join a firm.

Carrying the premiums for an individual health insurance policy is too much of a financial burden. Even if you have to pay a portion of your health insurance, the cost of a group plan is usually significantly lower, and the coverage provided is usually more comprehensive.

Ask the owner:

Like many insurance policies, disability insurance is based on a dire “what if” scenario. You may not think you need disability insurance if you’re young and healthy—but that’s a bet you shouldn’t make. A broken leg or a difficult pregnancy could put you on the disabled list and cut your income significantly. As you become more successful, long-term disability insurance, a more expensive option but which provides coverage in case of permanent disability, can be critical. Even though your income is commission-based, you are still eligible for disability insurance.

Ask the owner:

As you become more successful, you may want to consider buying supplemental, long-term disability insurance. Prices vary, so shop around, but expect to pay between one and three percent of your annual income. Don’t count on Social Security disability benefits. They are very difficult to qualify for and the income is minimal. To qualify for long-term “own-occupation” (see following bullet) disability policies, insurers may require applicants to have earned at least $50,000 a year for three years.

Look for …

If you don’t have a spouse or child dependent on you, then your life insurance needs are less demanding, although it is easier to buy whole-life (permanent) policies when you are younger. Your company may offer a small term policy and if you have no other dependents, then this could be sufficient for your needs.

If you are young and want broader coverage, you should consider term instead of whole-life (permanent) coverage. While term policies provide only death benefits, for a specific number of years, they have much lower premiums for younger, healthy applicants. Over your lifetime, though, whole-life policies are generally cheaper than term.

Ask the owner …

It may sound premature to discuss your retirement when you have just been offered a job, but you need to plan ahead. I offer my employees the opportunity to participate in a 401(k) retirement account.

A 401(k) is a personal pension plan. You will have the opportunity to decide how much of your earnings you want automatically deducted from your paycheck. Since the contribution is deducted from your earnings before federal, state, and local taxes are taken, you end up paying taxes on a lower amount of money. A 401(k) is a great tax-saver. You don’t pay taxes on this until you begin to withdraw money at the time of retirement.

If your company doesn’t offer a 401(k) plan, then start your own retirement program. Open a Traditional IRA or Roth IRA and contribute the maximum amount allowable under the law. The tax savings for today are a strong enough incentive to take action, but you’re also being smart in planning for your future. For more information, check out the Internal Revenue Service guidelines or individual retirement plans: www.irs.gov/retirement/article/0,,id=137320,00.html.

Ask the owner …

As I’ve mentioned before, sometimes you have to spend money to make money. Promotional giveaways like magnets with the company’s name, business cards, professional trade organization membership, networking lunches/dinners—all of these are reasonable expenses and you need to understand how many, if any, of these bills you’ll be expected to pick up. For those that you do, you need to speak to a tax professional to see what is deductible.

I provide my brokers with a wide variety of promotional giveaways. I buy magnets, calendars, pens, all embossed with the company’s name. I also provide personalized business cards. I have subscriptions to a wide variety of financial and trade magazines, newsletters, and newspapers that come to the office so that all staffers can read them. I provide each broker with a desktop computer, but they are expected to provide their own laptops. I provide all software. I buy thousands of holiday cards with greetings from the company, and each broker then personalizes them for his own clients and contacts. I underwrite the cost of all open houses. I had a corporate website designed and pay for the server.

I’m always looking for new ways to promote the company and encourage my staff to discuss new ideas. Within reason, I’m willing to underwrite most outreach programs.

Ask the owner …

And be sure to consult a tax professional about which, if any, business expenses you can deduct.

The Least You Need to Know