What Factors Affect Mortgage Rates and Loan Terms
This Article Is About What Factors Affect Mortgage Rates And Loan Terms:
Mortgage rates are determined by each borrower’s individual risk factors. Here are the factors that determine mortgage rates:
- Credit scores and other layered risk factors determine the mortgage rate
- The higher the risk, the higher the rates
- How loan level pricing adjustments are determined
In this article, we will discuss and cover how lenders determine mortgage rates for borrowers.
Factors Determining Rates for Borrowers
Many borrowers want to know why everyone has different rates on home loans. National mortgage rates fluctuate up and down several times daily. Some days are more volatile than others. However, the par rates from the Federal Reserve Board are not the actual rate each individual borrowers get.
Mortgage Rates have something called positive and negative adjustments to the par mortgage rates. This is depending on each individual borrower. Just because the national par 30-year fixed mortgage rate is 3.75% on a conventional loan does not mean that every home buyer will get the 3.75% interest rate.
Par Mortgage Rates Versus Loan Level Pricing Adjustments
The be most qualified borrower to get par rates of 3.75% (this rate is for illustrative purposes only) they need the following:
- perfect credit
- single-family home purchase
- over 740 credit scores
- 25% down payment and/or 75% LTV
- no negative credit item
Loan level pricing adjustments are pricing hits by lenders for borrowers with specific risk factors. The higher the risk, the larger the LLPAs are.
High Credit Scores Yield Lower Rates
A borrower with the above credit profile will most likely not have any negative price adjustments. High credit score borrowers will get the best par 3.75% mortgage rates (the par rate used in this example.
Borrowers with lower credit scores, high loan to value, higher debt to income ratios, will most likely get a negative price adjustment. Their mortgage rates will definitely be higher. Every lender has its own pricing hit based on risk factors.
Credit Scores And What Factors Affect Mortgage Rates
Credit scores have the biggest impact on mortgage rates, especially with conventional loans. The lower credit scores are, the higher mortgage rates will be.
For example, let’s take a case scenario:
- if mortgage rates nationally are 3.75%
- this rate will only be available for borrowers with credit scores of 740 or higher on a conventional loan
Conventional loan programs are extremely credit score sensitive:
- 720 mortgage rates can be quoted at 4.0%
- Scores at 700 FICO, the rate can be priced at 4.25%
- Scores falling between 680 and 699 the LLPA can drive the rate to 4.5%
- When the scores fall between 660 and 679 rates can be at 4.75%
- 640 and 659 credit scores, the mortgage rate can be priced at 5.0%
- Borrowers with scores of 620 and 639 FICO, the rates can be over 5.0% to 6.0% on a conventional loan
FHA loans are not as credit score sensitive as conventional loans.
Let’s take a case scenario and say FHA mortgage rates are around 4.0% nationally (We are using rates on this blog for illustration purposes only).
If credit scores are at 680 or greater, the chances are that borrowers will get the best mortgage rates on FHA Loans. However, if credit scores fall below 600 borrowers may get mortgage rates higher than 5.0% plus possibly pay discount points due to Loan Level Pricing Adjustments (LLPA).
Cash-Out Refinance Mortgage Has Higher Mortgage Rates
Homeowners who want cash-out refinance mortgage loans will get a higher mortgage rate.
- No matter which mortgage loan program borrowers choose, almost all lenders will charge between a 0.25% to 0.75% mortgage rate increase over the par rate on the cash-out feature.
Multiple-Units And 203k Loans Have Higher Mortgage Rates
Multiple-unit properties, 2 to 4 units, have higher mortgage rates than single-family homes for all mortgage loan programs.
- Both conventional, FHA, VA multiple unit property loans will normally have a 0.25% to 0.75% mortgage rate adjustment over par rates
- FHA 203k loan programs have higher mortgage rates
Normally, FHA 203k loans have LLPAs of 0.50% or more due to risk.
Loan To Value Price Adjustment
To get the best mortgage rates, you need a loan to value of 75% LTV or lower.
- Any loan to value higher than 75% LTV will get a mortgage rate price adjustment
Risk Versus Rewards
The higher the risk borrowers pose to lenders, the higher the mortgage rates.
- Lower credit scores pose a great risk for the mortgage lenders
- That is why lenders will charge a higher mortgage rate than those with higher credit scores
- A borrower who has more skin in the game, larger down payment, minimizes the risk to the mortgage lenders
- Larger down payments prove skin in the game
- Lower loan to value are considered compensating factors
- Less risk on lenders
- Larger down payment are charged a lower mortgage rate
- The lower the loan to value is, the lower the mortgage rate
2 to 4 unit properties pose a greater risk to lenders than a single-family home. Mortgage lenders charge a higher rate for multi-unit properties. Same with high-end homes. Mortgage rates for jumbo mortgages are higher than conventional mortgage rates. Condos have higher rates than single-family homes. Higher debt to income ratio borrowers gets higher rates. Manual Underwriting has higher rates than borrowers with approve/eligible per Automated Underwriting System.