Loans Are Not Priced by "Excellent, Good, Fair, Poor"

Many, many loan officers and banks post mortgage rates on a daily basis.  Many even have a nifty widget that enables the consumer to input a few general critera (loan amount, purpose, value, credit score...or, more likely:  "excellent, good, fair, poor" and, voila', up pops a rate and the consumer is compelled (?) to call to start the loan process.  The problem is that the rate the consumer is able to generate through a self guided mortgage rate calculation tool is very likely completely incorrect.

First off, lenders do not price loans on "excellent, good, fair and poor" credit.  Loans are priced on exact credit scores and many products/investors have different pricing adjustments for every 20 point variation to a consumers middle credit score (a small reminder that the highest score does not matter).   There are many other consumer and loan specific criteria that will affect the pricing model for each and every loan transaction and it is important that consumers and agents understand some of the variables to gain insight into why interest rates will vary from transaction to transaction........and, that a mortgage professional is not necessarily trying to take advantage of any consumer when pricing out a loan.

Let's review a few of the things that affect loan pricing and adjustments on a base rate for a mortgage:

1).  Credit Score:  As stated, some lenders and investors have increases or decreases to pricing "add-on's" on as little as 20 point variance.  It should also be noted that different lender/investors/loan products and loan programs ALL have unique and individual credit score requirements...a consumer could handily be approved for one product or program and be completely ineligible for another.

2).  Loan Purpose:  Purchase, Limited Cash out Rate and Term Refinance, No Cash out Refinance and Cash out refinances ALL have different underwriting guidelines and pricing adjustments.  The hardest thing for consumers to understand is that a refinance is considered "Cash Out" if any loan(s) happened subsequent to the purchase of the property.  Refinancing of two loans that were used solely for the purchase (an additional funds taken out) would be considered a "Rate and Term" refinance.  However, taking out a second after the purchase, refinancing multiple times and taking any cash out (over very stringent guidelines) subsequently would result in a new loan being considered "Cash Out".  (EXCEPTIONS:  Cash out can be taken to settle a property settlement agreement through the divorce process and the loan would still be considered a "Rate and Term".  The same applies (with many, but not all, lenders) if the funds were used for remodel or improvement of the home (NOTE:  this exception is a logistical nightmare because EVERY receipt, fee, bid and cost associated with the improvement MUST have the supporting documentation.  NOTE Number 2:  I have NEVER met a client who maintains sufficient records to qualify for this exception).

3).  Loan to Value:  In other words, the amount of the down payment affects the adjustments to the pricing.  And/or the appraised value of the property when weighted against the loan amount (for a refinance) will determine not only price, but whether or not the loan can even proceed.  Generally speaking, a consumer can finance a higher loan to value on a purchase than on a refinance. There are exceptions to this rule (DU Refi Plus, for example), but the qualifications are specific and restrictive:  very few consumers will qualify for the product.  Even FHA has lowered the maximum loan to value on a "Cash Out" refinance to 85% LTV (loan to value).

4).  Loan Program:  EVERY loan program has a different starting base for the rates and the adjustments can vary from program to program.  In other words, Conventional conforming, Conventional High Balance (varies per area of the country), FHA, VA, FHA High Balance, VA High Balance, Home Path, FHA 203(K), DU Refi Plus, Freddie Mac Relief, USDA, Jumbo, Super Jumbo and Construction to Perm or New Construction ALL have different pricing models for virtually every lender/investor.

5).  Loan Product:  The pricing and adjustments for fixed products versus adjustable products versus interest only are are different.  And, there are "differences to those differences" when pricing conforming to high balance to government programs.

6).  Impounds:  Also called "escrows", but it simply refers to paying your taxes and insurance with your mortgage payment.  Lenders/investors prefer to have impounds on a loan (and require it for all loans over 80% LTV, no exceptions) and generally have a .25% point adjustment upwards if a client wants to waive impounds.   (NOTE:  There are lenders who "price" with no adjustment for waiving of impounds.  This practice is nothing more than a manipulation of how their pricing model is presented....they have simply build the cost into all of the programs to meet investor standards).

7).  Property Type:  Is the property a Single Family Residence, Duplex, Three Plex, Four Plex, PUD, Townhome, Attached, Condo, Farm, Income producing, commercial (or any type I may have missed)?  Pricing and adjustments will vary from property to property.

8). Location of property:  This doesn't only refer to urban versus rural (and, yes, that may include adjustments), but it also refers to WHERE the property is...which STATE or REGION of the country.

9). Loan Amounts:  Lenders/investors have minimum and maximum loan amounts they are willing to lend on.  However, they also charge premium price for "less than" (<) and "more than" (>) loan amounts.  Expect to pay a premium for loans under 100K
 (and, some lenders have a benchmark of 150K).

10).  Secondary Financing:  Lenders will generally have an adjustment to pricing if the consumer is utilizing a combination of loans in the transaction.  The adjustment will be on the loan in the first lien position and will be in effect regardless of where the second in originating (seller, non-profit, institutional).

If I spend a little more time I could undoubtedly come up with more examples of how or why there are rate and pricing adjustments that a consumer just would not be aware of.  My company rate sheet is five pages of 0 point print and I referenced only my daily sheets to generate this post.  If I were to broker the loan to Chase, Wells Fargo, or anyone else you can be sure they have their own set of pricing adjustments to be evaluated and explained to a consumer.

To each his/her own, but I believe the mortgage career is a collaborative and consultative process and I do not post general rates because it creates mistrust from the very beginning.  I don't want to spend the first thirty minutes talking to a potential client in trying to defend why the rate/points they found on the nifty little widget are totally incorrect.  Do I do this?  Yes, every time I talk to a client after they have been surfing the internet for rates.  It is also my absolute belief that consumers and agents will not take mortgage professionals seriously and respectfully until we act like professionals.  Stating the lowest possible rate just to get the client to call does not conjure professionalism and continues to foster mistrust of everyone in the industry.

 

 

Deborah Garvin