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Whether you are buying a house, an investment property, or refinancing a current mortgage, there is a long list of variables that determine what rates you will pay. In addition to considering rates, there are still many types of loans available, each with their own eligibility criteria, that can affect your rates, including:
Conforming/Conventional: Conforming loans are those that follow Fannie Mae/Freddie Mac lending guidelines, because approximately 87% of all conforming mortgages are still sold to Fannie or Freddie. Typically conventional loans have a maximum loan amount of 417,000, regardless of where you live in the country.
Jumbo: Jumbo loans are those with loan amounts/balances above $417,000
High balance conforming: for 2009, the loan amounts that are considered “conforming” have been increased, pursuant to the American Recovery and Reinvestment Act. In areas where the average home prices are higher than Fannie/Freddie conforming limits, “High balance conforming” loans are now eligible for special rates, substantially lower than Jumbo loan rates, but a bit higher than conforming loan rates. Click here to determine the maximum loan amounts in your area to qualify for High balance conforming loans.
Government (FHA, VA, and USDA rural): These are loans that are insured by government entities, such as HUD, VA, and USDA.
ARM (adjustable rate mortgages): These are loans that start at lower rates than conforming, and your rate is locked for a specified period of time before the rate can adjust higher or lower (depending on the index your loan is tied to, and the margin, which never changes.
A few lenders are offering other loan types, but for the sake of this article, we will consider only the above.
Regardless of the type of financing you are seeking, there are other criteria that CAN affect the rate you will pay on your loan, including:
Credit score: When you apply for a mortgage, almost all lenders will require what is called a “Tri-merge” credit report which pulls your credit history from all three of the major credit bureaus. Most lenders will use the “mid score” to determine your rate eligibility (because all three credit bureaus have different formulas for determining your score, so expect each score to be different, and because not all creditors report to all three bureaus.)
Your credit score is the number one factor in determining the rate and types of financing available to you, so your credit history is critical. Currently most lenders require scores of 740 or better to qualify for the best advertised rates, but this is very dependent on the type of financing you want. For example, VA FHA loans are not nearly as rate sensitive as Fannie/Freddie loans.
Credit history: Lenders are looking for a number of factors on your credit history, including, but not necessarily limited to:
- Derogatory information, such as collections, judgments, bankruptcies, “settled accounts” where you were ‘forgiven’ part of your debt, foreclosures, etc?
- How much you owe other creditors?
- Payment history: just one 30 day late payment in the last 12 months can disqualify you from many loan programs.
- Other mortgages and their history
LTV (loan to value ratio): how much down payment can you make, compared to your purchase price? For a refinance transaction, how much is your house worth compared to the loan you are requesting? The lower the LTV - to a point - the better the rate will be.
Debt ratio - how much do you owe other creditors relative to your monthly income? Lenders look at two debt ratios, the ratio of the new mortgage payment (including taxes, insurance, HOA payments, and any other recurring debts associated with your mortgage payment) to your gross monthly income, AND the ratio of all your debts, including the new mortgage payment, relative to your gross monthly income.
Different loan programs have different debt ratio limits, but in general, most programs are looking for ratios close to 38/45 (38 is your mortgage payment to income, 45 is the ratio of all debt to income.)
Type of property: a house, condo, condotel, manufactured house, land, etc. If you are buying a manufactured home, for instance, you should expect to pay higher rates, and because not all lenders are doing manufactured home loans, your choices will be more limited. Looking for financing on a condhotel? You may be limited to financing by the builder, the development, or private money.
Occupancy: Will you live in this house, is it a second home or an investment? How many other investment properties do you own? How long is your history as a landlord?
Lock period: How long do we need to lock this loan? Can the loan close in 30 days or less? Often, this depends on you getting all the required paperwork to your lender quickly. But some of this is out of your control. Before a loan can close, an appraisal is required. This can take up to 3 weeks from the date it is ordered until it is received. Also, as this market has become so volatile, some lenders are offering rate incentives for very short locks of 7 -12 days, so many people are opting to wait to lock the loan until after final lender approval has been received.
Employment history: Most lenders want to see at least 2 years at the same job, or at least in the same line of work.
Type of Loan: Refinance or Purchase: If you are refinancing your house, is this to get a better rate and term, or do you need cash out? Cash out loans usually have an upward adjustment to rate, especially if the Loan to Value is higher than 70%.
Location: Rates differ from state to state AND can also be affected by being in an area designated as "declining value?" Most areas of the country are still as "declining value." This primarily affects how much you can borrow, relative to the value (LTV), but could also affect the rate.
Loan Amount: Believe it or not, most lenders charge a higher rate for loan amounts under $100,000.
And if all the above information isn’t enough, if you are shopping for a mortgage, it is also important to work with someone with offices close to the property you want to finance. A lender in Arkansas, for example, may not have Oregon rates available, and may not know about any special loan programs or financing specials running in your area of interest. Mortgage brokers work with big banks, but also work with smaller, less well known, and sometimes local lenders. Because these smaller lenders do not advertise, they can sometimes offer lower rates.
Mortgage rates are very volatile right now. Some lenders adjust rates several times a day based on the most current market rates. Other lenders might change rates only once a week. So, it is very important to shop for mortgage rates before you settle on a lender.
Questions and comments are always welcome.
Regards,
Comments
Shelby,
Good overview, but there really is only one way to get the "best" rate possible -- and it is the biggest secret in the mortgage business.
That is why I put up a free video revealing the #1 secret to get a "free" mortgage.
myfreemortgage(dot)com
You don't mention anything about this secret that all mortgage pros know - and is by far the leading cause of someone not getting the "best" interest rate.
Justin
Justin
I just watched your video with your big secret. Yield spread is not a secret. If you have been watching the news the last two years, it is the most exposed "secret" around. AND, even with 0 yield spread, someone with any problems in any of the areas I listed in my article will not qualify for the best advertised rates. EX, if your credit score is 650, you will pay higher rates because you are a higher risk. Zero yield spread won't help. End of story.
Justin
I forgot to mention that banks and credit unions, that also have loan officers (pros) are also paid an equivalent of yield spreads, but do not have to disclosure the extra (bonus) compensation they receive for higher rates like mortgage brokers and their loan officers do. With loan officers of mortgage brokers, all yield spread IS disclosed, so the borrower can see exactly what the loan officer is being paid. Still, if any of the above reasons for a higher rate apply, the borrower will be subject to the same rate increases that mortgage brokers have to charge. I think you need to get more in touch with what is going on in the current lending environment. Credit is tight and getting tighter everyday.
Shelby, How to get the best rates? Default on your existing loan and then re-mod it! It's pretty tough to beat 2-3% rates with a loan mod! ;-)
Good job debunking Justin's purported conspiracy regarding yield spread premiums. Borrowers need to remember to search for the best deal for themselves, not the lowest profit for a particular loan officer. They're not necessarily the same thing. Pricing varies widely by investor to whom a loan is sold or brokered. It depends upon the brokerage's volume, who underwrites the loan, who funds the loan, etc etc. Loan Officer A could offer, say, 5.50% where he/she earns no yield spread, while Loan Officer B could offer the same fees, 5.375% and earn a 1/2% yield spread premium. Loan Officer A would have less gross income, but Loan Officer B would be offering the better deal. It's analogous to two home sellers selling identical homes. Seller A bought the house for $225,000, but is now selling it for $200,000. Seller B inherited an identical house next door and is now asking $190,000. The $190k house is the better deal for the buyer, even though the seller has a bigger profit.
Dan -Thanks for your comment. I agree with you totally. It should not be about how much money the loan officer is making, but about who is offering you the best rates and terms available to you. I could say the same about closing costs too. If Lender A is offering you 5% with a 1 point fee, and Lender B is offering you 5.25% with a $500 flat fee, you need to figure out which is the better deal for you over the long term, not just which loan costs less at the outset. That higher rate, over the long term could end up costing the borrower tens of thousands of dollars. A good loan officer should be able to help the borrower figure out "break even" points on various offers.
Bob - Thanks for your comment. I'd love to know more about your specific situation. For instance, is your low rate permanent? What did your default do to your credit score? What are the consequences of that low score? I've heard of people who have all their insurance cancelled (car, house, etc) because their rates fell too low to qualify. In almost all cases, the annual premiums increase a lot when your score drops. Has this happened to you? yet?
To be honest, I would NEVER recommend someone default to qualify for a lower rate. Many lenders consider those who default too high a risk to modify - you were lucky. AND, please read my post about the HOPE program. Lenders actually prefer to foreclose because they make more money on foreclosures. As I said, you were very lucky. But I do wish you all the best and thank you for the comment.
Shelby, my comment was not ment as a personal issue. I'm on the opposite side of foreclosure ... I sold in 2004 and now rent. However, my comment was ment to be tongue and cheek. No one would recommend default as a way to gain better rates. You are correct the penalty is far to great vs. the rate itself. That said, I would encourage you to find someone involved in the loan-mod game these days. Let's face facts here with delinquency rates for loans and leases at U.S. banks increasing to a record 6.49% in the second quarter from 5.58% in the first quarter banks are doing things they never would have done before (i.e. low rates, lowered loan amounts, etc.). As a side note to rates keep in mind that considering 1st morts, 2nds and HELOC's virtually 50% of all morts are now under water. Banks loose 50% on homes they foreclose on ... so giving up some loan amounts and a low rate is now begining to look much better to them.
Wow... I want a FREE Mortgage! Comments and webistes like that are what is wrong with banking. There is NO FREE MORTGAGE. You pay for it one way or another, as Shelby has said.
I highly doubt a loan officer is going to do a FREE mortgage with no lender fees or commission. Hopefully all the "sales" people are leavign the industry and the real professonials can give real advice.
Thank you everyone for your comments. I never thought this post would generate so much controversy, but I love the comments.
For Justin - as Tyler says, no self respecting loan officer is going to do a loan for free. Getting a loan closed these days is a nightmare. Not only have lenders made lending guidelines tight, but underwriters tear a loan package apart again and again. I've had clients say "they feel like criminals" before they can actully get a loan closed. I've jokingly told clients that before all is said and done, I'll know everything about them, expcept maybe the size of their underwear.
As for finding a "good" loan modification company? Take a look at my post about the HOPE modification program. Do they exist?Lenders do NOT want to modify. They make MORE money on foreclsoures, in spite of what they would have us believe. IF they made more money on modifications, they would be doing them.
I recently wanted to get some quotes on my mortgage before I started the process. I noticed that when I spoke to everyone on the phone they would just throw rates out there at me. I finally spoke to www.MortgageRefinancing.com and the guy told me that he only wanted to give me a real quote. He looked at my credit income and many other things then sent me a real good faith estimate. I was happy because when he explained how rates work and what actually goes into them I wondered to me self how real are these quotes that these other guys are giving me if they are just throwing them out there.
Wayne - great question
The truth is that mortgage rates are changing ALL the time. Most lenders change rates with movements in the markets (and which market they are following depends on their investor for any particular loan type (30 yr fixed, 5/1 ARM, etc). While your Good Faith estimate was valid at the time it was issued, the rate quoted does not become valid UNTIL your loan is locked!
While you are calling around, loan officers can only quote you best rates at that moment. But noone can really quote you a final rate until they have a full application, credit report, paperwork, and your loan has been through underwriting. A good faith estimate must be issued to within 3 days of submitting an application. But remember, it is just an estimate. Rates and fees can change.
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