What Determines Your Mortgage Rate?

Posted on September 23, 2009

Mortgage rates have fallen in a big way this year!  Many of you have already refinanced and others are trying to take advantage of the $8000 Tax Credit for First Time Home Buyers.  While rates don't sit at their lows for the year at the moment, they are still very good.  For the most part rates are 4.75% - 5.5% on most products.  Why the range?  Well I want to educate you a bit on what goes into a rate quote and why yours may be different from someone else's. 

First, your overall credit score is critical in getting the best possible rate. Keep in mind that on a joint application we will use the lower of the two middle scores. For example; borrower A has scores of 708, 804, and 790 but the co-borrower has scores of 620, 608 and 595. We will use the 608 score for qualifying purposes. It is crucial to structure the loan the "right way" from the beginning to ensure you get the best possible product and rate.

Second, the loan-to value or (ltv) is also an important factor in determining your rate. For instance, a borrower putting 20% down will get a better rate than someone who is requesting a 95% loan. 

Third, your overall "financial portfolio" will help determine whether or not you get the best possible rate. What do I mean by this? Individuals who have savings accounts, investment accounts, 401K money and a low debt-to-income ratio or (dti) are putting themselves in a better position to qualify for a lower rate than someone who does not have the above.

Fourth, Loan Amount can make a difference as well.  Just as there are rate hits for low credit scores, it is the  same for low loan amounts.  This isn't as big of a deal to you since the lower the loan amount the less of a difference in monthly payment you will see when rates vary.

What does all of this mean? Simple; the lenders risk will determine your rate. That is why someone putting 20% down, who has 800 credit and money in reserves will get a better rate than someone who is putting 5% down, has 620 credit and only $500.00 in reserves. The risk is greater on the later individual and therefore they will get a higher rate than the first borrower. This does not mean that the later borrower will not get a horrible rate,  it simply means that they will not get the best rate possible given their current financial situation and credit portfolio.

Now while the above concepts are accurate for conventional loans you do have a couple other options.  These are Government Loans.  FHA, VA, and USDA.  These are by far the products of choice in today's market.  Why?  Because the Government absorbs the risk. Therefore even though the same concepts are followed a more forgiving product is available. Instead of incurring huge rate hits for credit score like on conventional loans, Government loans have few hits.  If you have a 620 score you qualify.  Depending on the lender this gets you the same rate as a 800 score. (some lenders will hit you a little bit if you are under 660)  USDA and VA require no money down and FHA is only 3.5%.  A little easier on the pocketbook that 5% down.  These loans all have funding fees, but VA and USDA have no monthly mortgage insurance.  FHA has a reduced monthly mortgage insurance premium when compared to conventional loans.  So with these perks, Government loans are extremely popular.  They simply allow lower credit scores and higher LTV's without charging higher than average rates.

I hope this helps you understand what factors go into a rate and why they vary from product to product.  It isn't as simple as "my buddy just got 5% so that is what my rate should be!" 

Brought to you by:

Flat Branch Home Loans, Inc.