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.