How Are Mortgage Rates Priced
Most FAQ By Borrowers Are How Are Mortgage Rates Priced
Mortgage shoppers often see a variety of mortgage rates when shopping for a loan and often wonder on how are mortgage rates priced. Whether it is from an ad by mortgage companies on TV or online, they will most likely see the lowest rate than when they contact a loan officer. For example, they may check Freddie Mac average mortgage rate report and see that the mortgage rates are published at 3.25% by when they contact various mortgage lenders, they may get quotes of substantially higher than the rate quoted on Freddie Mac. Mortgage rates posted online on such websites as Bank Rate may be much lower also. The fact is that the chances are that borrowers will get quoted higher mortgage rates by lenders than mortgage rates published online because of risk based pricing.
Loan Level Pricing Adjustments
How Are Mortgage Rates Priced: Risk based pricing for mortgage borrowers is known as loan level pricing adjustments, commonly referred to as LLPA. Loan Level Pricing Adjustments is the key on how are mortgage rates priced. Loan level pricing adjustments applies for Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are the two mortgage giants in this country who sets the rules for conventional loans and sets the standards of loan level pricing adjustments. Loan level pricing adjustments is where a higher rate adjustment is placed on a borrower due to the borrower’s credit scores, loan to value, the type of property, and the type of occupancy. For example, Fannie Mae and Freddie Mac consider a borrower with a lower credit score higher risk so a lower credit score borrower will get hit with a higher rate than a borrower with a higher credit score. The lower the loan to value the lower the mortgage interest rates. Loan to value is the balance of the mortgage loan divided by the value of the property so lenders consider borrowers who put more money down on a home purchase less likely to foreclose because they have skin in the game. The type of occupancy is a factor when pricing mortgage rates. Lenders consider a primary owner occupied property less risky than an investment property because when things go bad for a borrower, the borrower is less likely to foreclose on an owner occupied property than they would on a rental investment property.
Factors Influencing Mortgage Rates
How Are Mortgage Rates Priced: Just having great credit scores and payment history are not the only factors that influence mortgage rates. Many borrowers with 800 FICO credit scores often get upset at the multiple lenders they contact when they get a substantially higher quote on a mortgage rate than they have seen on ads or online. Ads can be extremely misleading and mortgage shoppers need to be careful when they see ads by mortgage companies offering low balled rates. Many mortgage companies still send out massive mailer offering ridiculously low interest rates and borrowers should realize that if it is too good to be true, it is. As a loan officer, I know every trick of the trade that mortgage companies use with ads and mailers. There are templates on mailers where the mortgage company will advertise ” Mortgage Rates Starting As Low As 2.99%”. However, by law, the mortgage company needs to put a disclaimer on the ad which there is an asterisk and a disclaimer. A sample disclaimer may state that the 2.99% interest rate is available only for 15 year fixed rate mortgages for borrowers with at least a 780 FICO credit score with 75% loan to value who can pay 2 points upfront. Advertising is extremely closely monitored by the Consumer Financial Protection Bureau, commonly referred to as the CFPB, and mortgage companies and/or loan officers who do not comply with the rules set by the CFPB can get fined. The CFPB does not mess around and has a reputation of fining companies millions of dollars for ad violations. Most mortgage companies who get fined by the CFPB do not fight it and just pay the fine.
Many borrowers think that prior bad credit such having outstanding collections, charge offs, late payments, foreclosure, short sale, and bankruptcy affect the mortgage rates they will get. This is not true. There are six factors that determine a borrower’s mortgage rates.
- Type of Occupancy – The type of occupancy of the borrower will determine the borrower’s mortgage rates. Lenders view owner occupant properties a less likely to foreclose if a borrower goes through a tough financial time. Borrowers will less likely to foreclose on a rental investment property than their own home.
- Type of Property– Lenders view a condominium as a riskier investment than a single family home so their will be a pricing level adjustment on a condominium which means rates will be higher. Higher risk, higher rates.
- Number of Units – Multi unit properties are considered higher risk so interest rates on 2 to 4 unit properties will be higher than mortgage rates on a single family home.
- Cash-Out Refinance Loan Versus Rate and Term Refinance: There are pricing adjustments on cash-out refinances. Cash-out refinances is considered more risky than rate and term refinances so rates will be higher.
- Subordinating a second mortgage via a piggyback loan is considered another layer of risk so there will be a pricing hit which means a slightly higher rate adjustment.
- Credit scores – Borrowers will get pricing adjustments if they have lower credit scores.
- Loan To Value – The more down payment a borrower puts down on a home purchase, the less riskier the borrower. Borrowers who put down the least amount of down payment will get a pricing hit on their mortgage rate.
Preparing For Mortgage
Now that we covered on how are mortgage rates priced, what can you do to get the best mortgage rates and terms. There is nothing you can do with how are mortgage rates priced and the pricing hits you will get if you do not have the 20% down payment. There is nothing that you can do if you have a type of property in mind like a condo or multi unit property where you will take a pricing adjustment due to the type of property. Same goes with the occupancy type and if you need a cash out refinance mortgage loan where those two classes will get pricing adjustments. However, there is something that you can do to get the best possible mortgage rates by maximizing your credit scores. A borrowers credit scores has a big impact on the mortgage rate the borrower will get. There are huge pricing hits on conventional loans for borrowers who have lower than 700 FICO credit scores. A borrower’s credit scores has a major factor in the LLPA pricing system. Mortgage Rates have credit score cutoff charts versus pricing hits. for example, to get the best mortgage rates on a conventional loan, you need a 740 FICO credit score. Then you will take pricing hits on loan to value, occupancy types, type of property, loan amount, number of units, cash-out refinances, subordinating a second mortgage, loan to value, and last but not least, credit scores. If your credit scores are at 740 FICO or higher, then you will not take a pricing hit. However, if you are taking pricing adjustment hits on all other items and you have lower credit scores, your mortgage rates will be higher because besides taking the pricing adjustment hits on the other line items, you will also be taking a pricing hit for your low credit scores. If you are planning on applying for a mortgage in the near future, consult with a loan officer as soon as possible so you can try to get your credit scores as high as possible.
Tips In Maximizing Your Credit Scores
Credit Scores can go higher than 800 FICO. However, there is a point when someone is applying for a mortgage loan where once you hit a particular credit score, it no longer matters how much higher your credit scores are. This high point is 740 FICO. As long as you have gotten your middle credit score to at least a 740 FICO, you are set and no matter how much higher your credit scores are, it will not affect your mortgage interest rates. For example, if a borrower has a credit score of 800 FICO, the mortgage rate this borrower will get will be the same as if his credit scores were at 740 FICO because after a certain credit score point, the same mortgage rate will apply because lenders already consider them prime borrowers.
The opposite of the above holds true on cases where a borrower has lower credit scores. A borrower with a 640 credit score will get a much higher mortgage rate than a borrower with a 740 FICO credit score.
Loan To Value Factor In LLPA
Conventional Loans are not guaranteed by any governmental entity so loan to value is an important factor when it comes on how are mortgage rates priced and in loan level pricing adjustments. Lenders believe that the lower the loan to value, the less the risk, the lower mortgage interest rate they are willing to offer the borrower. More skin in the game by the borrower yields less likelihood for a potential foreclosure. In the event if the lender were to foreclose on a borrower who has substantial equity in their home, the chances of the lender losing money is less likely and borrowers with substantial equity in their homes offer more security to the lender. Statistically, for a lender to break even on a foreclosure, the borrower needs to own a property with at least a 80% loan to value. Borrowers with higher than 80% loan to values are required to have private mortgage insurance.
Other Factors On How Are Mortgage Rates Priced
Besides credit scores and loan to value, there are other factors on how are mortgage rates priced and the degree on how are mortgage rates priced and their level of pricing adjustments depends from lender to lender. There can be pricing adjustments on judicial states because to foreclose on judicial states, the foreclosure process takes much longer and is much more costly than the foreclosure process in non-judicial states.
Many borrowers often do not understand on how are mortgage rates priced based on occupancy of the borrower. Mortgage lenders feel that owner occupied primary resident borrowers will take better care of their homes than they would a second home or investment property. If financial situations where the borrower has loss of income arises, the lender feels that the borrower will be more likely to pay on their owner occupied primary home than they would their second or investment home, therefore, there is a pricing adjustment hit on second and investment properties.
For borrowers who want the best of the best mortgage rates, the two main factors that have a great impact on mortgage rates are credit scores and loan to value. Plan on maximizing your credit scores well beforehand as well as come up with as much down payment as possible so you can get the best mortgage rates.