What Are Factors That Determine Mortgage Rates?

This Blog On Factors That Determine Mortgage Rates Was Written By Gustan Cho NMLS 873293

Many borrowers often ask the question of factors that determine mortgage rates.

Below are common questions that get asked by many first time home buyers:

  • Why is it that one mortgage borrower gets a better mortgage rate than another mortgage borrower?
  • Is it a particular mortgage lender than another mortgage lender that offers a better mortgage rate?
  • Is going to a bank going to get me a better rate than going to a mortgage broker or mortgage banker?
  • Is it credit scores?
  • Will higher credit scores give me a lower mortgage rate?
  • Is it the type of property that I am buying that will give me a lower mortgage rate?
  • Will my down payment affect my mortgage rate?
  • Will bad credit history such a prior bankruptcy or foreclosure things that determine mortgage rates?  
  • Are FHA mortgage rates lower than Conventional mortgage rates?
  • What could I do to get the best possible mortgage rates?  
  • What are factors that determine mortgage rates are common questions that I get asked daily by home buyers, especially first time home buyers.

Mortgage Companies Offering The Lowest Mortgage Rates

Mortgage Lenders are private companies where they spend a large portion of their revenues on marketing and advertising to get borrowers to do business with them. They will do everything possible to get you in the door even if you do not qualify in the hopes that you qualify with them. There are factors that determine mortgage rates that no matter what mortgage lender you go with that may not help you at all because you do not qualify for a mortgage loan. There are many borrowers who do not have the luxury in shopping for mortgage rates because they have credit and/or income issues and may be lucky if they have a lender that can potentially do their home loan.

  • For example, if you have a 580 FICO credit score, outstanding collections, recent late payments, and higher debt to income ratios, the chances are that you will get a higher mortgage rate and the chances are that you will not qualify with many mortgage lenders and may only have an option of one or two lenders that may be able to do your home loan.
  • On the flip side, if you have a credit score of 800 FICO, have 25% to put down on a home purchase, and have documented income and low debt to income ratios, you can get a home loan anywhere and get the best possible mortgage rates from any bank or mortgage lender in the country.

There are factors that determine mortgage rates and mortgage borrowers should be careful with mailers they get offering staring mortgage rate offers of 2.99% if you call them within 24 hours of receiving the mailer. If you look at the fine print of the mailer you will probably see disclosures that you can hardly read with the following disclaimers on the 2.99% mortgage rates the mortgage company is offering:

  • 2.99% mortgage rate for 15 year Conventional mortgage loan program
  • Need a 740 FICO Credit Score
  • 75% Loan To Value or 25% Down Payment On Conventional Loan
  • Needs to be a single family home
  • Needs to pay up to 5% discount points

The above bullet points will be under the 2.99% mortgage rate offer as a disclaimer that you need to satisfy the above conditions for you to get that mortgage rate. However, the disclaimers above is hardly readable, even with the magnifying glass. On another note, when you see mortgage companies advertise 2.99% mortgage rates, they will show the above disclaimer but for only seconds where no human being in the world will have enough time to read it and if you were to pause your television, you can hardly read the text of the disclaimer. Again, welcome to the world of marketing and advertising.

Factors That Determine Mortgage Rates On FHA Loans

Government Loans are mortgage loans that are owner occupant primary residential loans that is guaranteed and insured by the federal government. For example, FHA Loans are insured by the Federal Housing Administration which is a division of the United State Department of Housing and Urban Development or HUD. FHA is not a lending institution nor does it originate or fund FHA Loans.

  • FHA role is to act as a mortgage insurer to banks and mortgage lenders who are HUD approved and as long as the FHA approved mortgage lender follows HUD FHA Lending Guidelines
  • FHA will insure the FHA Loan (portion of it) in the event if the FHA borrower defaults on their FHA insured loan and goes into foreclosure.
  • Whatever the home sells for at the sheriff’s auction, FHA will insure the difference which is normally 20% or the original purchase price.
  • Due to this insurance by FHA, FHA lenders can offer very low mortgage rates with the borrower only putting 3.5% down payment.

VA Loans

Same with VA Loans. The United States Department of Veteran Affairs is the governmental agency that insures VA Loans just like HUD insure FHA Loans.

  • The Department of Veteran Affairs will cover the mortgage lender who originates and funds the VA Loan as long as the bank and/or VA approved mortgage lender follows VA mortgage lending guidelines with the VA borrower.
  • VA approved mortgage lenders can offer very low mortgage rates on VA Loans with the borrower not putting any money down on a home purchase because the skin of the game the VA borrower has is that the Department of Veteran Affairs is guaranteeing the VA Loan in the event the borrower does default on their VA Loan and that loan goes into foreclosure.

USDA Loans

USDA Loans is guaranteed by the Department of Agriculture Rural Development. To qualify for a USDA Loan, the property needs to be located in a USDA Rural Development approved area and the borrower needs to qualify under USDA mortgage lending guidelines. USDA Loans do not require the borrower to put any money down but has restrictions on the maximum household income and the maximum debt to income ratios cannot exceed 41% DTI.

Factors The Determine Mortgage Rates

Here are factors that determine mortgage rates on government loans:

  • Credit Scores. The higher your credit scores are, the lower your mortgage rates are.
  • Prior bankruptcy, deed in lieu of foreclosure, foreclosure, short sale are not factors that determine mortgage rates on government loans.
  • Prior bad credit issues, outstanding collection accounts, late payments, judgments, tax liens, charge off accounts are not factors that determine mortgage rates on government loans.
  • Types of properties and the types of loans are factors that determine mortgage rates on government loans. For example, two to four units, condominiums, and FHA 203k Loans and FHA Reverse Mortgages are considered higher risk so your mortgage rates will be higher.
  • Loan terms and type of loan programs are factors that determine mortgage rates on government loans. 15 year mortgage rates will have lower mortgage rates than 30 year fixed rates government loan programs because the government is not liable for that particular mortgage rate for 30 years and are only liable for 15 years. Same with adjustable rate mortgages. ARMs have lower mortgage rates than extended fixed rate government mortgage loans.
  • Loan sizes are factors that determine mortgage rates. Loans under $100,000 will have a pricing adjustment hit to the mortgage rates. Any mortgage loans under $200,000 will have pricing adjustments and a larger price adjustments will be with loan balances of under $100,000.
  • Down payments on government loans normally are not factors that determine mortgage rates. Lenders are not too much concerned with the little down payment or no down payment that government loans require because the fact of the matter is if the government loan defaults and goes into foreclosure, the government entity guaranteeing and insuring the mortgage loan will minimize the loss of the home loan.
  • Cash-Out refinancing have higher mortgage rates than rates and term refinancing.

Factors That Determine Mortgage Rates: Fannie Mae And Freddie Mac

Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set mortgage lending standards on Conventional Loans. Conventional Loans are called Conforming Loans because they need to conform to Fannie Mae and/or Freddie Mac mortgage lending guidelines. Conventional Loans are not government loans so there will be many more factors that determine mortgage rates with Conventional Loans than it would with government loans.

Here are the factors that determine mortgage rates on Conventional Loans:

  • Amount of down payment that the borrower puts down on a home purchase or the loan to value a homeowner has on a refinance mortgage are factors that determine mortgage rates on Conventional Loans. For the best rates, borrowers should have 25% down payment or 75% Loan To Value. Any equity less than that will be factors that determine mortgage rates on Conventional Loans.
  • Cash-Out refinancing on conventional loans are factors that determine mortgage rates on conventional loans. Cash-Out Refinances have higher mortgage rates than Rate and Term refinancing.
  • Credit Scores are major factors that determine mortgage rates on Conventional Loans. The best mortgage rates a borrower can get on a Conventional Loan is if they have credit scores of 740 FICO credit scores or higher.
  • Type of properties are factors that determine mortgage rates. A single family home is considered the safest investment and will yield the best Conventional mortgage rates. Condos, two to four unit properties are considered riskier properties and will yield higher mortgage rates. Second home and investment properties will yield higher mortgage rates than owner occupied primary residence mortgage loans on Conventional Loans.
  • Loan amounts is other factors that determine mortgage rates. Conventional Loan amounts of less than $100,000 will take a big pricing hit adjustment and rates will be higher on smaller loan amounts.
  • Prior bad credit such as bankruptcies, foreclosures, deed in lieu of foreclosures, short sales, late payments, collections, charge offs, late payments, judgments, tax liens, and other past credit issues have no bearing with mortgage rates and borrower should not be concerned with them.

Preparing To Get Best Mortgage Rates

There are ways to get the best mortgage rates. However, it takes time for you to get yourself ready to maximize your credit scores to be able to get the best mortgage rates possible. If you are planning on buying a home or refinancing your current home, the best advice given is to consult with a loan officer and get yourself prepped up. Here are the things you will get out of consulting with a mortgage loan originator way ahead of you pulling the trigger in applying for a home loan:

  • See what mortgage loan program you qualify for and see if you meet all of the mortgage lending guidelines on the loan program you are applying for
  • See if your credit report is accurate and make sure that you do not have any errors on your credit report
  • Make sure that you do not have any credit disputes that will disqualify you for a mortgage loan
  • Make sure that your credit scores are high enough and have the loan officer run your credit profile through the FICO Analyzer to see what potential credit score improvements there is to be made to optimize your credit scores to the best potential you have
  • If you have no revolving credit tradelines, you have time to add yourself as an authorized user to a family member/spouse’s credit card or get yourself several secured credit cards
  • Get how much money you need to save to be able to cover your down payment and closing costs on your home purchase
  • If you need a co-borrower, you will have time to shop for a family member who is willing to be your non-occupant co-borrower
  • If you have unsourced cash, you can deposit it right away to your bank account to start the 60 day seasoning period of your bank account
  • If you have overdrafts or bounced checks, you have sixty days to let it season on your bank account
  • If you are self employed or did not do your taxes, you will have time to either do a income tax amendment and/or file your taxes
  • If you need credit repair due to many recent late payments or errors on your credit report, you can start the credit repair process started

It does not cost you a penny to get free consultation from a licensed loan officer. If you are not sure whether you qualify for a mortgage or want to get prepped up to get the best mortgage rate possible, feel free to contact me at 262-716-8151 or text me for faster response. You can also email me at gcho@gustancho.com. I am available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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