Why Can’t I Get the Best Mortgage Rate?

Why Can’t I Get the Best Mortgage Rate?

So you heard your neighbor brag about his new 4% thirty-year rate? Or maybe you just read an article describing how rates have dropped to historic lows, or you heard a local mortgage company advertise 4% rates.

But when you call to apply you’re offered a rate of 4.125%. You’re shocked. After all, you have excellent credit. You have a solid job history. And you owe less than seventy-percent of your home’s value.

So why can’t you get the lowest mortgage rate advertised?

Best Case Scenario vs. Risk-Based Pricing

First, the lowest mortgage rates are typically reserved for best case scenario loans. These are loans that carry the smallest risk of default. A best case scenario loan typically has:

  • Loan-to-value (LTV) under 60%
  • Credit score over 740
  • Loan amount under $417,000
  • Debt ratios under 41%

Mortgage companies and banks usually advertise rates based on this best-case scenario or one similar. Once a lender takes your application they will access price hits for anything outside these parameters. This is called risk-based pricing. These hits can negatively affect your rate.

Different Rates for Different Programs

Your loan program can also affect your final rate. Conventional programs (Fannie Mae, Freddie Mac) have different risk-based price adjustments than government programs (FHA and VA).

For example, a credit score of 680 combined with an 80% LTV on a conventional loan will result in a higher rate than a FHA loan with the same criteria. While 680 is considered “A” credit, it is a third-tier score on the conventional score-card. And while having an LTV of 80% might allow you to avoid mortgage insurance, it is the highest LTV allowed on cash-out conventional loans. Therefore, risk-based price hits are accessed.

FHA programs simply don’t have the same price hits as conventional programs. They require mortgage insurance which helps to offset a lot of risk. So in the example above, an FHA loan will most likely have a lower rate.

Many banks and lenders offer their own portfolio programs too. These programs are usually created to help fill a niche in the market place. They typically expand beyond the conventional and government guidelines. Consequently, the rates can be a little higher than conventional and government loans.

Different Rates from Different Lenders

Finally, rates can differ from lender to lender. Lenders and banks all have money built into their rates. They all start at basically the same point, but then increase their rates in order to collect a service release premium (SRP) when they sell the loans on the secondary market. This is why bank rates can differ from one institution to another.

Brokers have the distinct advantage of being able to offer rates from multiple banks and lenders. This allows them to compare lender rates daily and offer their clients the best possible rates available.

A Word of Advice

In this post- meltdown environment, risk-based pricing is more strict than ever. With a back-log of foreclosures still on their books, lenders and banks want to ensure that new loans perform well (payments are made on time). This is one reason why it’s tough, even for “A” credit borrowers, to obtain credit at the lowest rates.

It’s important not to split hairs here, though. Often the difference in a 4% rate and a 4.125% rate is negligible. While you might lose out on bragging rights with your neighbor, you can still obtain a lower rate today than at any time in history. In fact, rates are so low that you may never need to refinance again.

Our advice is to apply with a couple lenders, compare rates and programs, and make a decision. Shopping or holding out until you get that one rate you heard advertised on the radio just doesn’t make sense. There is such a thing as paralysis by analysis. Don’t let these rates pass you by. Act now.

Mortgage Bankers vs. Banks and Direct Lenders

Comparing Mortgage Bankers to Banks and Direct Lenders

Understanding how mortgage bankers compare to banks and direct lenders is crucial when shopping for a mortgage. However, finding unbiased information is difficult. False myths and stereotypes dominate the mortgage landscape. It’s important to separate fact from fiction.

Below is a breakdown of a few factors that can influence a borrower’s decision of where to obtain their mortgage. A sober comparison of the facts reveals both distinct differences and surprising similarities between mortgage bankers, banks and direct lenders.

Loan Servicing

Almost all mortgages are sold on the secondary market. Gone are the days of big banks and lenders servicing home loans for entire terms. The only variable now is when the loan is sold.

  • Banks and direct lenders often service loans for the first year in order to collect interest payments. Then, they sell the loans
  • Bankers never service loans. They are typically sold by the lender immediately after closing

Rates and Fees

Mortgage transactions are never free. Borrowers pay for their mortgage through the rate, fees or a combination of the two. It’s critical to recognize that rates and fees are interrelated. One directly impacts the other. Here are the facts:

Banks and Direct Lenders

  • They are limited to offering only their mortgage rates
  • Historically, they have been able to charge fewer fees than mortgage bankers because the bulk of their profit is tied to the rate:
    • They collect interest payments when they service loans
    • They collect a Service Release Premium (SRP) when they sell loans. The SRP is largely affected by the interest rate. Therefore, they have a financial incentive when setting the rate. Most banks bump their rates to increase profitability
    • It’s not uncommon for banks and direct lenders to charge fees in addition to what they earn on the rate
    • They are not required to disclose the SRP to borrowers

Mortgage Bankers

  • Historically, they have been able to offer lower mortgage rates because they can shop among multiple wholesale lenders. They also have access to wholesale rates with no profit built in
  • They never collect interest payments or profit by selling loans on the secondary market. Instead, they are paid a fee for the service they provide. Mortgage Bankers can earn their fee in one of two ways:
    • Borrower Paid: The borrower pays an origination fee to the mortgage banker and obtains the lowest wholesale mortgage rate available
    • Lender Paid: The borrower pays zero origination fees in return for a slightly higher mortgage rate. The wholesale lender then pays the mortgage banker a yield spread premium (YSP)
    • They cannot charge an origination fee and collect YSP. It’s strictly one or the other
    • They are required to disclose the YSP to borrowers

Home Loan Options

Today, borrowers have fewer home loan options than in years past. Mortgage bankers, banks, and direct lenders generally have access to the same basic home loan programs. The most popular are Conventional, FHA, and VA.

  • The difference is that banks and direct lenders don’t always offer all programs. And they are often inflexible with qualifying guidelines
  • Mortgage bankers have access to a variety of different wholesale lenders. Each offers different programs, niches and guideline enhancements. Mortgage bankers can also access specialized portfolio programs through wholesale lenders. They can provide several home loan options for their customers and approve certain loans that banks deny

Together, mortgage bankers, banks and direct lenders provide borrowers with a clearly defined choice. Understanding the differences allows borrowers to make educated decisions about where to obtain a mortgage. Borrowers should base their decision on what’s best for their individual situation.