What is a Loan-Level Price Adjustment LLPA is Best Described as?
Many borrowers often ask the question of factors that determine mortgage rates. Not every borrower will get the same mortgage rates on government and conventional loans. Rates are based on the risk level of borrowers. Prior bankruptcy and/or foreclosure does not matter with pricing on mortgage rates. On government loans, credit scores are the main factor in determining mortgage rates.
Frequently Asked Questions On How Lenders Price Mortgage Rates
Below are common questions that get asked by many first time home buyers:
- Why is it that one mortgage borrower gets a better mortgage rate than another mortgage borrower?
- Is it a particular lender than another mortgage lender that offers a better mortgage rate?
- Is going to a bank going to get me a better rate than going to a mortgage broker or mortgage banker?
- Is it credit scores?
- Will higher credit scores give me a lower mortgage rate?
- Is it the type of property that I am buying that will give me a lower rate?
- Will my down payment affect my rates?
- Will bad credit history such a prior bankruptcy or foreclosure things that determine rates?
- Are FHA mortgage rates lower than Conventional mortgage rates?
- What could I do to get the best possible rates?
What are factors that determine mortgage rates are common questions that I get asked daily by home buyers, especially first time home buyers. In this article, we will discuss and cover the various factors that determine mortgage rates.
Mortgage Companies Offering The Lowest Rates
Mortgage Lenders are private companies where they spend a large portion of their revenues on marketing and advertising to get borrowers:
- They will do everything possible to get you in the door even if you do not qualify in the hopes that you qualify with them
- There are factors that determine mortgage rates
- No matter what lender borrowers go with that may not help them at all because they do not qualify for a mortgage loan
There are many borrowers who do not have the luxury of shopping for mortgage rates.
Understanding On How Rates Are Priced
This is because they have credit and/or income issues and may be lucky if they have a lender that can potentially do their home loan.
For example, here is a case scenario:
- if you have a 580 FICO credit score, outstanding collections, recent late payments, and higher debt to income ratios, the chances are you will get a higher mortgage rate
- chances are you will not qualify with many lenders
- may only have an option of one or two lenders that may be able to do the home loan
- On the flip side, if borrowers have a credit score of 800 FICO, have 25% to put down on a home purchase, and have documented income and low debt to income ratios, they can get a home loan anywhere
- They can also get the best possible mortgage rates from any bank or lender in the country
Factors That Determine Mortgage Rates
There are factors that determine mortgage rates:
- Borrowers should be careful with mailers they get mailers offers of 2.99% if you call them within 24 hours of receiving the mailer
- If you look at the fine print of the mailer you will probably see disclosures
- Can hardly read with the following disclaimers on the 2.99% mortgage rates the lender is offering
- 2.99% mortgage rate for a 15-year Conventional mortgage loan program
- Need a 740 FICO
- 75% Loan To Value or 25% Down Payment On Conventional Loan
- Needs to be a single-family home
- Needs to pay up to 5% discount points
The above bullet points will be under the 2.99% mortgage rate offer as a disclaimer that you need to satisfy the above conditions for you to get that rate.
- However, the disclaimers above are hardly readable
- Even with the magnifying glass
- On another note, when you see mortgage companies advertise 2.99% interest rates, they will show the above disclaimer but for only seconds
- No human being in the world will have enough time to read
- If you were to pause your television, you can hardly read the text of the disclaimer
Again, welcome to the world of marketing and advertising.
How Are Mortgage Rates On FHA Loans Priced
Government Loans are owner-occupant primary residential loans that are guaranteed and insured by the federal government. For example, FHA Loans are insured by the Federal Housing Administration which is a division of the United States Department of Housing and Urban Development or HUD. FHA is not a lending institution nor does it originate or fund FHA Loans. The role of HUD is to act as a mortgage insurer to banks and lenders who are HUD-approved. As long as the FHA-approved mortgage lender follows HUD Guidelines, FHA will insure the loan (the portion of it) in the event the borrower defaults. FHA insures lenders on the loan if the borrower goes into foreclosure. Whatever the home sells for at the sheriff’s auction, FHA will insure the difference which is normally 20%, or the original purchase price. Due to this insurance by HUD, lenders can offer very low mortgage rates with the borrower only putting a 3.5% down payment.
Mortgage Rates On VA Loans
Same with VA Loans. The United States Department of Veteran Affairs is the governmental agency that insures VA loans just like HUD insures FHA loans. The Department of Veteran Affairs will cover the lender who originates and funds the VA loan. This holds true as long as the lender follows VA guidelines.
Why Are Rates On VA Loans Low With 100% LTV
Lenders can offer very low mortgage rates on VA Loans with no money down on a home purchase. This is because the government guarantee by the Department of Veteran Affairs is guaranteeing the VA loan in the event of borrower default and/or foreclosure. VA insures lenders in the event borrowers default on their VA Loan and that loan goes into foreclosure.
Rates On USDA Loans
USDA Loans are guaranteed by the Department of Agriculture Rural Development. To qualify for a USDA Loan, the property needs to be located in a USDA Rural Development approved area. Borrowers need to qualify under USDA lending guidelines as well. USDA Loans do not require home buyers to put any money down. But has restrictions on the maximum household income. The maximum debt to income ratios cannot exceed 29% front end and 41% back end debt to income ratio.
Other Factors The Determine Mortgage Rates
Here are factors that determine mortgage rates on government loans:
- The higher the credit scores are, the lower the interest rates are
Prior bankruptcy, deed in lieu of foreclosure, foreclosure, short sale are not factors that determine mortgage rates:
- Prior bad credit issues, outstanding collection accounts, late payments, judgments, tax liens, charge off accounts are not factors that determine mortgage rates
- Types of properties and the types of loans are factors that determine mortgage rates
- For example, two to four units, condominiums, and 203k Loans and Reverse Mortgages are considered higher risk so rates will be higher
- Loan terms and type of loan programs are factors that determine mortgage rates
- 15-year mortgage rates will have lower rates than 30 year fixed rates government loan programs
- This is because the government is not liable for that particular rate for 30 years
- Is only liable for 15 years
- Same with adjustable-rate mortgages
- ARMs have lower rates than extended fixed-rate mortgages
- Loan sizes are factors that determine mortgage rates
- Loans under $100,000 will have pricing adjustments
- Any loans under $200,000 will have pricing adjustments
- Larger price adjustments will be with loan balances of under $100,000
- Down payments on government loans normally are not factors that determine mortgage rates
- Lenders are not too much concerned with the little down payment
- Or no down payment than government loans require
- This is because the fact of the matter is if the government loan defaults and goes into foreclosure, the lender will be insured
Cash-Out refinancing has higher interest rates than rates and term refinancing.
Factors That Determine Rates On Conventional Loans
Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set mortgage lending standards on Conventional Loans.
- Conventional Loans are called Conforming Loans
- This is because they need to conform to Fannie Mae and/or Freddie Mac lending guidelines
- Conventional Loans are not government loans
There will be many more factors that determine mortgage rates with Conventional Loans than they would with government loans.
Factors That Affect Rates On Conforming Loans
Here are the factors that determine mortgage rates on Conventional Loans:
- Amount of down payment that the borrower puts down on a home purchase or the loan to value a homeowner has on a refinance are factors that determine mortgage rates
- For the best rates, borrowers should have a 25% down payment or 75% Loan To Value
- Any equity less than that will be factors that determine mortgage rates on Conventional Loans
- Cash-Out refinancing on conventional loans are factors that determine mortgage rates
- Cash-Out Refinances have higher mortgage rates than Rate and Term refinancing.
- Credit Scores are major factors that determine mortgage rates
- The best mortgage rates a borrower can get on a Conventional Loan is if they have credit scores of 740 credit scores or higher
- Type of properties are factors that determine mortgage rates
- A single-family home is considered the safest investment and will yield the best Conventional mortgage rates
- Condos, two to four-unit properties are considered riskier properties and will yield higher mortgage rates
- Second-home and investment properties will yield higher rates than owner-occupied primary residence mortgage loans
- Loan amounts are other factors that determine mortgage rates
- Conventional Loan amounts of less than $100,000 will take a big pricing hit adjustment and rates will be higher on smaller loan amounts
- Prior bad credit such as bankruptcies, foreclosures, deed in lieu of foreclosures, short sales, late payments, collections, charge offs, late payments, judgments, tax liens, and other past credit issues have no bearing with rates
- The borrower should not be concerned with them
Preparing To Get Best Pricing On Rates
There are ways to get the best rates. However, it takes time for you to get yourself ready to maximize credit scores to be able to get the best mortgage rates possible. If planning on buying a home or refinancing a current home, the best advice given is to consult with a loan officer and try to get the highest credit scores possible.
Preparing Credit Profile Prior To The Start of The Mortgage Process
Here are the things you will get out of consulting with a loan originator way ahead of you pulling the trigger in applying for a home loan:
- See what loan program you qualify for
- See if you meet all of the lending guidelines on the loan program applying for
- See if the credit report is accurate
- Make sure not to have any errors on the credit report
- Make sure not to have any credit disputes
- Make sure credit scores are high enough
- Have the loan officer run credit profile through the FICO Analyzer to see what potential credit score improvements to be made to optimize credit scores
- Borrowers with no revolving credit tradelines have time to add themselves as an authorized user to a family member/spouse’s credit card
- Or get several secured credit cards
- Get how much money you need to save to be able to cover down payment and closing costs on a home purchase
- If you need a co-borrower, you will have time to shop for a family member who is willing to be non-occupant co-borrower
- If you have unsourced cash, you can deposit it right away into your bank account to start the 60 day seasoning period of your bank account
- If you have overdrafts or bounced checks, you have sixty days to let it season on the bank account
- If you are self-employed or did not do your taxes, you will have time to either do an income tax amendment and/or file your taxes
- If you need credit repair due to many recent late payments or errors on the credit report, you can start the credit repair process started
It does not cost you a penny to get a free consultation from a licensed loan officer. If you are not sure whether you qualify for a mortgage or want to get prepped up to get the best mortgage rate possible, feel free to contact us at Capital Lending Network, Inc. at 800-900-8569 or text us for a faster response. You can also email us at email@example.com. The team at Capital Lending Network, Inc. is available 7 days a week, evenings, weekends, and holidays.