What type of loan may include a yield spread premium as part of its structure?

A yield spread premium is a form of compensation that a lender can receive from a borrower when the borrower agrees to accept a higher interest rate on their loan. This premium can be used to cover closing costs or other fees associated with the loan, effectively reducing the upfront cash requirement for the borrower.

FHA loans, which are government-backed mortgages designed for low-to-moderate-income borrowers, often utilize this structure because they allow for various forms of financing and compensation. Lenders may use yield spread premiums to make these loans more attractive to borrowers who may struggle with larger down payments or closing costs.

In contrast, conventional loans often operate under stricter guidelines regarding lender compensation, while VA loans have specific benefits and limitations pertaining to fees and funding. Subprime loans, while they can involve high rates and fees, are typically associated with riskier lending practices and do not generally involve yield spread premiums in the same manner as FHA loans. Therefore, the inclusion of a yield spread premium is most relevant and structured within FHA loans.