Things That Determine Mortgage Rates On Home Loans

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Things That Determine Mortgage Rates On Home Loans

This BLOG On Things That Determine Mortgage Rates On Home Loans Was UPDATED On October 13 2018

Major Things That Determine Mortgage Rates

Main two thing hings that determine mortgage rates are credit scores and property types. There are other things that determine mortgage rates. Loan Level Pricing Adjustments (LLPA) are things that determine mortgage rates:

  • However, with Conventional Loans, other things that determine mortgage rates besides credit scores and property types are loan to value
  • Loan to value are not things that determine mortgage rates with FHA, VA, and USDA Loans
  • This is mainly because these entities insure mortgage loans in the event borrowers defaults on their mortgage loans
  • However, Fannie Mae and Freddie Mac are the two mortgage giants in the United States that govern and regulate Conventional Loans
  • Conventional Loans are not insured by Fannie Mae or Freddie Mac
  • Any loan to value that is higher than 80% LTV, borrowers need to get private mortgage insurance
  • Any borrower who puts at least 20% down payment or more does not need to get private mortgage insurance on conforming loans
  • FHA Loans require mandatory a one time upfront FHA mortgage insurance premium
  • FHA also require an annual FHA mortgage insurance premium for the life of a 30 year fixed rate mortgage loan
  • VA Loans does not require an annual VA mortgage insurance premium
  • But does require an upfront VA Funding Fee
  • Funding Fee can be rolled into the balance of the VA Loan
  • USDA does require an annual USDA annual mortgage insurance premium

Things That Determine Mortgage Rates On Conventional Versus Government Loans

Conventional Loans are by far the loan program that has the biggest mortgage rates versus credit scores impact.

  • In order to get the lowest mortgage interest rates, borrowers needs to put 25% down payment on a home purchase and needs a credit scores of over 740 FICO
  • The lower the down payment and higher loan to value, the higher the mortgage rates will be for borrowers
  • The lower the credit score, the higher the mortgage rates
  • Conventional Loans are not insured by any government entity
  • So private mortgage insurance is required for all Conventional home buyers who put less than 20% down payment and has a loan to value that is higher than 80% LTV

Impact On Credit Scores And Mortgage Rates

Credit scores does have impact on government loans.

  • FHA Loans, VA Loans, and USDA Loans are called government loans
  • This is because they are insured by a governmental agency
  • FHA Loans are insured by the Federal Housing Administration
  • VA Loans are insured by the United States Department of Veteran Affairs
  • USDA Loans are insured by USDA Rural Development Guaranteed Housing Loan Program
  • These government housing guarantee agencies will guarantee lenders in the event if borrower defaults on government mortgage loans
  • Due to this guarantee, lenders of government loan programs do not care how much down payment borrowers puts as down payment
  • This is because in the event of borrower default, it gets insured

Credit Scores Versus Mortgage Rates On Government Versus Conforming Loans

Mortgage rates do have an impact with government loans:

  • However, credit scores and rates are not as sensitive as Conventional Loans
  • For example, borrowers will not need a 740 FICO to get the best mortgage interest rates on government loans
  • A 680 credit score will be sufficient in getting the best FHA and/or VA mortgage interest rate
  • However, borrowers with under 640 credit scores will get higher mortgage rates on FHA and VA Loans even though FHA and VA Loans are guaranteed by the federal government
  • Lower credit scores means higher risk borrowers
  • Higher risk borrowers are charged higher mortgage rates

Things That Determine Mortgage Rates With Bad Credit And Prior Bankruptcy And Foreclosures

Most borrowers are under the assumption that bad credit and prior bankruptcies and foreclosures will have a negative impact on the mortgage rates they will get.

  • This is not the case
  • Lenders only use the borrower’s credit scores to determine mortgage rates with the exception of Conventional Loans where the loan to value does have an impact
  • Prior bad credit has no impact on mortgage rates
  • Examples of derogatory tradelines that has no impact on mortgage rates are the following:
    • such as outstanding unpaid collection accounts
    • prior late payments
    • prior judgments
    • prior charge offs
    • prior tax liens
    • prior bankruptcy
    • prior foreclosure
    • prior short sale
    • prior deed in lieu of foreclosure
    • other prior derogatory credit issues have no impact on mortgage rates

Days where consumers get charged high interest rates due to having prior bad credit on home loans are long over and it is illegal. Again, prior bad credit has no bearing whatsoever on rates on home loans. Credit scores is what determines mortgage rates as well as property types.

Things That Determine Mortgage Rates On Property Types And The Type Of Loan Program

The type of property you purchase and the type of loan program are things that determine mortgage rates.

  • A single family home has lower mortgage rates than a condominium or two to four unit property
  • This is because lenders feel that a single family home is less riskier investment than a condominium or a 2 to 4 unit property
  • The type of loan program are things that determine mortgage rates as well
  • Mortgage rates on a second home or investment home will be higher than those of a owner occupant primary residence mortgage loan

Pricing Adjustments On Loan Programs

FHA 203k Loans have higher mortgage rates than standard FHA Loans:

  • This is because mortgage lenders view FHA 203k Rehab Loans as riskier investments than standard FHA Loans
  • Jumbo mortgages have higher mortgage rates than standard conforming conventional loans
  • This is because lenders view it as riskier investments than standard conventional loans
  • In the event if lender will foreclose on a Jumbo Loan, it will take much longer for lenders to sell and liquidate the higher end property than it would a regular standard home

The Jumbo home market is a niche market and not many folks can afford higher end homes and the lending standards of Jumbo mortgages are much tougher than Conventional or government loans.

Gustan Cho Associates at Loan Cabin Inc. has no overlays on government and conforming loans . Feel free to call or text us at 262-716-8151 or email us at gcho@loancabin.com.

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