Lenders determine a different mortgage rate and fee structure for each home loan applicant that comes through their door. This practice seems odd in today’s market, where news headlines and advertisements appear to quote a single rate for everyone.
What headlines don’t say is that a generic rates is either an average or a “vanilla” rate for the most ideal borrowers. But most home loan applicants don’t fit into this tight mold. Countless factors affect the rate – the borrower’s credit score, property, and loan type are just a few examples.
Lenders start with current rates then add layers of risk factors that apply to the applicant. If the borrower knows what the lender looks for, he or she can achieve a lower rate by becoming a lower risk for the lender.
Getting Lower FHA Loan Rates
FHA is the loan program of choice for home buyers with less-than-perfect credit. The FHA program allows borrowers with a score as low as 500. But a low credit score costs the borrower money. A lender could raise a borrower’s rate by as much as one-half of one percent for having a 580 credit score rather than 680.
This difference in score would cost the borrower an extra $5,000 during the first five years of a $200,000 loan.
Many borrowers pay the extra amount needlessly. An FTC study found that 25% of all credit reports contain errors that lowered the consumer’s credit score. A rate based on an erroneous score means wasted money.
The borrower should obtain a credit report and examine it carefully before or during their loan application, and dispute any errors. The credit bureaus from which most lenders obtain credit scores – Transunion, Experian, and Equifax – must remove disputed items if there is adequate documentation that supports it.
Get help from a credit professional if the bureaus refuse to remove the item. Credit scores can rise by 100 points or more, meaning a lower mortgage rate and thousands of dollars saved.
Lower Conventional Rates
Fannie Mae and Freddie Mac home loan rates are subject to Loan Level Price Adjustments, or LLPAs. These are adjustments based on risk factors like credit score and loan-to-value ratio. For instance, a borrower will drop their rate by one-eighth of one percent if they put down 30% rather than 20%.
Conventional interest rates, however, do not rise for most borrowers when the down payment drops below 20%. Home buyers should not fear an astronomical rate because they put 5% down. Their mortgage insurance policy takes on the risk of the smaller down payment. The lender, in turn, issues the same rate as they would for a 20% down borrower.
When the equity reaches 20%, the borrower can cancel the mortgage insurance and retain the low rate. It is an effective way to keep out-of-pocket expenses to a minimum when buying a home without breaking the bank with a high interest rate.
Reduced VA Loan Rates
Every day, home owners with a VA home loan apply for the popular VA streamline refinance. This program allows borrowers to drop their rate and payment without supplying proof of income, assets, or home value.
The 30-year fixed option is the most popular VA streamline option, but a 15-year VA loan yields a much lower rate. Fifteen-year loan rates are 0.50% to 1% lower than those of a 30-year loan. And the 15-year loan will save the borrower over $100,000 in interest over the life of a $250,000 loan.
Short-term loans are a lower risk for lenders. Borrowers have less chance of default when the payment term is cut in half. VA streamline applicants should look into these popular short term loans to further reduce already-low VA rates.
Home Loan Rate Reductions
A little knowledge about how lenders price loans can save the borrower thousands. Lower rates are usually available if the borrower can tweak their situation to lower risk for the bank.
Lenders are happy to issue a lower rate because it means a low risk mortgage note, and a happier customer. Check today’s low market rates, then make your rate even lower by becoming the optimal borrower.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a licensed loan officer with over 12 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.