Time and time again we get this question from some of our clients. “I read in the papers that the average rate for mortgages is _____%. Yet I am being quoted a higher rate than average. Why am I being asked to pay more?”
This is a very good question and one that deserves more than a “cryptic” answer. After all, your home is the most important investment and typically your largest payment. The rate you are charged directly affects that payment.
First, you must understand that the averages reported by major information sources such as Freddie Mac and BankRate.com will be based upon averages of those who have certain “personal” and “transactional” characteristics or variables. Each of these variables may affect the rate you will be asked to pay. In this report we will explain many of these variables that can affect the rate and thus the payment of a home loan. It should also be noted that if you are paying mortgage insurance because of a down payment of less than 20% on a conventional loan, these variables will not only increase the rate on the home loan, but the cost of this insurance as well.
Credit Score. The most widely recognized and most important of all variables is tied to your credit score. Most applicants now understand that a poor credit record can affect the rate they pay. The higher the score the better and you may need a score of 720 or more in order to procure the lowest rate quote.
What can cause your score to be lower? Late payments, significant blemishes such as judgments or bankruptcies, too much credit or not enough credit and more. It is important to note that a low score does not only affect your mortgage rate, but can also affect your rate on credit cards, other loans and even insurance rates. Here is the good news: by working with someone knowledgeable such as your loan officer, you can raise your score and lower your quote.
Too many debts. If you are carrying too many debts, you may not only have a lower credit score, but also a high “debt- to-income” ratio. This high ratio may result in not being qualified for all loan programs.When choices are restricted, the choices that remain may result in a higher rate.
Not enough income. In the past, “no-income verification” programs solved the problem for many who had income, but could not document that income for lenders. The financial crisis has caused most of these programs to go away and again limits choices to those which may allow higher debt-to-income ratios.
Primary Residence. Most mortgage “averages” are quoting the rate on a primary residence, which means you live in the property. If you are purchasing or refinancing a property you are renting out as an investment, the rate is going to be higher and there will be other underwriting restrictions such as a requirement for a larger down-payment. Second or vacation homes not rented out often times are quoted the same as primary residences but that is not always the case. For example, one popular program, FHA, does not finance second homes except in unusual circumstances.
Down-payment or equity. If you are putting the minimum down or you have little equity in the home when refinancing, you are likely to be asked to pay mortgage insurance that protects the lender against default. This raises the cost of the mortgage.Some programs will charge a rate premium as well as mortgage insurance.
Large Loan Amounts. If you are looking for a large mortgage which exceeds the conforming (Fannie Mae or Freddie Mac), as well as FHA and VA loan amounts, then you may be asked to pay a higher rate. The secondary markets are not as efficient for “jumbo” mortgages as the government does not support this segment of the markets as significantly.
Type of property. Many property types can cause a higher rate. One of the most common is condominiums, especially those that don’t have approval from the entities specified in the previous paragraph. What would cause a condo project not to be approved? Perhaps there is a high percentage of investors owning units or a high percentage of owners behind on paying association dues. Other property types that may include premiums on rate could include duplexes, rural properties, properties with combined commercial usage and other unusual properties.
This list should not be considered exhaustive as there are other situations that may affect your rate. However, this list does demonstrate the importance of meeting with your loan officer BEFORE you purchase a home so that you can make a more informed decision.