An Accurate Estimate of Your Mortgage Interest Rate Requires The Lender To Know These 8 Items
Other than “How are you, ” the question I seem to get asked the most as a loan officer is “what are the rates today?” It may be the people I am talking to think it is a good conversation starter for a loan officer or just that they are curious. Whatever the reason, it happens a lot, and when it does my mind starts racing with the information I need to collect. An interest rate is based on several factors. These are different for every person who uses a mortgage to buy a home. To be accurate a lender would need to know answers to the 8 items below.
Part of the problem starts with a number of online lenders that bombard people with rates that don’t apply to them. The rates you see in an online portal typically apply to a “prime borrower.” In the fine print, it will most likely say the borrower’s score is in the high 700’s or low 800’s, and they are most likely putting a significant amount of money down on the purchase.
**A quick note about the fine print and why your loan officer sweats when you ask him what the rate is:
When a lender offers a rate or other financial terms they must disclose an APR and how they came up with said rate. To just throw out a number puts them in jeopardy with the Consumer Finance Protection Bureau (CFPB).
There are a lot of factors that go into determining what rate you would get when locking in your purchase or refinance.
1. Loan Program
The loan program a borrower qualifies for or chooses to use is important in determining the rate. Each loan program will have a different rate. Typically a Conventional Loan will have a little higher rate than a Government Insured Loan. Examples of Government Insured Loans would be VA, FHA or USDA.
You will also typically have a higher rate when using a down payment assistance loan. In Washington State, the most common type of down payment assistance would be the WSHFC Home Advantage Loan. In this case, your lender would have no control over the rate as they are set by the WSHFC.
2. House Type
If you are buying a unique property your rate will usually be a little higher. For example, the rates to purchase a Manufactured Home will be a little higher than those of the more traditional built home. You will also most likely have a little higher rate for a new construction loan. Multi-Unit Properties like duplexes will also have a little higher interest rate.
3. House Usage
Whether you are buying the home as a primary residence, second home, or investment property will influence the rate you get. In almost all cases the rates for a primary residence will be lower than they would be if you were purchasing a second home or an investment property. Those purchasing investment properties will typically have the highest when it comes to house usage influencing the rate.
4. Credit Score
Simply put the lower your credit score the more of a risk your loan is to the lender and servicer of your loan. Your credit score will not only affect your ability to qualify but your interest rate. If your score is higher you will have more options to choose from in terms of loan programs and the rates they offer.Verify my mortgage eligibility (Sep 30th, 2022)
5. Term of Loan
6. Length of Lock
Lenders will have pre-set time frames for a lock. They can start as low as 7 days. However, they typically start at 15 days and grow in 15-day increments. (i.e 30 days, 45 days and 60 days). If you are using a shorter term lock you will probably have a little lower rate. Rates can change daily and in many cases throughout the day. Be sure that your rate lock will last until the closing date or you may be required to pay extension fees that can add up quickly.
7. Down Payment
The amount of money you put down may also have an effect on the rate you get from the lender. The more you put down the less of a risk you will be viewed as in the lender’s eyes. While some of the zero down programs have low rates, many of the down payment assistance program’s rates will be higher than their standard program counterparts.Verify my mortgage eligibility (Sep 30th, 2022)
8. Paying to buy down the rate
Every borrower will have the option to buy down their interest rate if they choose to. This would come in the form of a discount point or an origination fee. The cost for this will be a small percentage of the loan amount (typically 1%). This can also go the other way. The lender could premium price your loan and credit you the difference toward your closing costs.
Next time you ask a lender what the rate is, be prepared to answer a few questions if you want an accurate estimate that is specific to you. At the end of the day your rate will be based on your overall loan profile and the “risk” it presents to the lender who will be servicing your loan.
**this post is not from HUD, VA, FHA and was not reviewed or approved by any government agencies.Show me today's rates (Sep 30th, 2022)