Which Borrowers Get the Best RatesDaniel Dobbs2023-05-25T20:23:45-07:00
This post is the second part of a series, outlining how interest rates get priced to borrowers.
This post, however, focuses on your clients as individuals.
In addition to talking about properties, every buyer wants to know about rates, overall lending practices, credit issues.
Get the Lowest Interest Rate, Fees, and Fastest Service
YouTube – Straight Talk Lending – Daniel Dobbs
Agents able to talk professionally with their clients about rates and lending will earn the clients trust, respect and referrals.
Note: Many agents are under the (false) impression (by their office/sales managers) that they can’t talk about lending.
Wrong! Clients want to hear your opinion – so share it- just as long as the information is accurate.
Borrowers Must Exercise Their Own Due Diligence
The best way for buyers to get the lowest interest rate is to start by using “due diligence.”
1) Choose a lender from a referral source.
Everyone knows a friend or family member with a story to tell about their mortgage experience. Some good – some not so much!
It usually depends on the level of personal service they received. Or didn’t!!
2) There’s No Free Money
If you or your client hears a lender advertising super-low rates and if it sounds too good to be true, IT IS!
Lenders with big advertising budgets, fundamentally see borrowers /buyers as a “1 off” transaction with little or no expectation of future repeat biz.
That’s just their business model – advertise -advertise- advertise and when rates go up, fold up shop and wait until rates go back down in a few years and start the boiler room thing all over again.
It’s a good business model for them, lousy service model for borrowers.
3)Working by Referral
The MLOs who receive referrals from agents and/or other borrowers are under REAL pressure to please the client AND the referral source, as they are seeking future and repeat business.
The MLO’s business relationship with the referring source is always riding a good outcome – that’s the best guarantee any borrower as the loan will go as smoothly as possible.
3a) Refinances: Apply BEFORE rates drop!
Rates go up much faster than they go down.
Too often, borrowers (refis) wait until rates drop before they apply for the loan, then it’s too late, they’ve missed the small window period when rates dropped to their lowest level.
Buyers starting the home shopping process should also begin the due diligence and application process well before they begin running their agents around!
In both cases – the quicker a buyer can close escrow, the shorter the Interest rate lock period is required, the lower their rate will be.
4) Save on Fees
In place of doing due diligence, a few borrowers try and “game” the system by applying at multiple lenders at the same time.
This leads to paying for two appraisals (typically $500+) and is wasted money.
5) Bad Service
“Double apping” with multiple lenders also leads to late COEs.
When both lenders, find out the borrowers have multiple applications (via the credit report), MLOs typically put those buyer’s applications at the “back of the line” and process the applications most likely to fund first.
Just as no agent wants to be “the backup agent,”; no MLO wants to be the backup lender.
Multiple applications = higher fees and worse service.
All Rates are based on “Risked Based Pricing”
All interest rates are based on the principle of “risk-based pricing.”
Each buyer AND their loan type have their own risk factors.
Also, each lender has their own level of risk they are willing to accept when pricing out a loan, so rates at one lender may be lower than another – but only fractionally.
The higher the buyer’s (and their loan type) cumulative risk – the higher their interest rate.
The factors are:
Credit Score(s)
Loan to Value (LTV)
Type of Loan (Fixed vs. Adjustable)
Loan Purpose (“Rate and Term Refi” vs. “Cash out” Refi)
Length of Loan (30 years vs. 20,15,10 years)
Loan Amount (Conforming/ConformingHigh Balance, JUMBO)
Investor Type (Fannie/ Freddie, FHA -VA)
Type of Property (Condo vs. SFR vs. “Units”)
Type of Occupancy (Primary – Investment – 2nd Home
Length of the Rate Lock period
Amounts of Points / Fee’s paid
The First Underwriting Criteria Is Fico Scores
Almost every borrower has 3 Fico scores, and the “mid” Fico is what lenders use to “price” interest rates.
The lower the Fico scores – the higher the interest rate and vice versa. The difference between a 660 FICO score and a 740 FICO score is approximately .375%.
Credit scores can be raised by paying off or down outstanding debt or settling with past creditors.
At the bottom of this post (in the “footer menu)” is 6 credit articles. If your client has credit issues – direct them there.
Loan to Value (LTV)
The more money a buyer puts down, (or has equity in the property – at the time of refi), the lower the interest rate they’ll receive.
The difference between 5% down vs. 25% down can be much as a half of point in interest rate.
Type of Loan (Fixed vs. Adjustable)
Adjustable rates mortgages (ARMs) are priced slightly (0.25%) lower than 30 year fixed mortgage rates but adjust upwards after (typically) 5 or 7 years.
Few buyers will take the risk of a 5 or 7-year adjustable-rate mortgage (ARM) – when a 30-year FIXED rate is only .25% higher.
Loan Purpose (“Rate & Term Refi” vs.”Cash out” Refi)
A simple “Rate & Term Refi” is a new loan that rolls the interest rate down with little or no increase in the loan balance.
A borrower can refinance (rate and term) up to a max. loan to value (LTV) of 90%.
A “cash-out refinance loan” is a new loan that pays off the former lender and adds an additional amount to the current loan balance; the loan’s “cash-out proceeds” are often used to pay off debt, make home improvements.
Cash-out refi loans are limited to a maximum. LTV of 80% and are priced .375% higher than a “rate and term” refi.
Length of Loan (30-year vs. 15 year)
The shorter the term of the loan, the lower the interest rate, but the principal and interest (P&I) portion of the monthly payment is higher.
Typically, the rate on a 15 yr. loan is .5% lower than a 30-year mortgage.
The “PI” (principal and interest) portion of the payment is typically 40% more than a 30-year loan.
Loan Limits
“Conforming”/”Conforming High Balance”/”Jumbo”
Loan Limits vary by County for Fannie and FHA loans.
Click here for a comparison and list of the county by county loan limits
“Conforming” loan amounts have the lowest interest rates.
“Conforming High Balance” is .375% higher (typically) than just “conforming.”
Jumbo” loans are all difficult unless a buyer has a lending relationship with their bank, 740 Ficos+, and 25%+ down.
Investor Type (Fannie/ Freddie, FHA -VA)
Fannie Freddie Loans are typically priced slightly higher than FHA and VA but have lower PMI rates.
However, while 30-year FHA loans are lower in rate, ALL have higher monthly PMI (for the life of the loan) AND a 1.75% “funding fee” (added into the loan balance).
VA loans are usually the lowest rate BUT have (up to) a 3% funding fee – but no monthly PMI fee.
The VA funding fee can be (full or partially) waived if the vet is full or partially disabled or a purple heart recipient.
Type of Property (Condo vs. SFR vs.” Units”)
Condos are priced slightly higher than SFRS.
Why? Because they have a higher rate of foreclosure when the real estate market flounders.
Fourplex and triplex loans are priced higher (and require more down) than duplex financing.
Type of “Occupancy”
Primary – Investment – 2nd Home
Owner-occupied (primary residence) loans are priced lower (usually .75%) than non-owner-occupied (investment) loans.
Typically, a primary residence rate’s pricing is .5% lower than “2nd home – rate pricing.
Length of “Rate Lock”
15 days, 30-Days vs. 45 Days
Loans are taking 30 days for COE; the question is whether it is going to drag out to 45 days.
The longer the rate is locked, the higher the rate.
Amounts of Points to Buydown “the rate.”
Unless it is required for a borrower (to qualify): Never pay points to buy down an interest rate as it takes far too long for the homeowner to recapture the money for the initial cash outlay
Let’s do the math:
Scenario 1
Purchase Price $500k….$400k Loan / “30 yr. fixed”
Interest Rate of 3.5% (2 Points)
Principal / Interest Payment: $1796
Cost of the Loan $8k
Scenario 2
Purchase Price $500.. $400k Loan / “30 year “Fixed.”
Interest Rate of 4%
Cost of the Loan (No Points)
Principal / Interest Payment: $1910 ($114 higher)
Cost of Scenario 1: $8K
Cost of Scenario 2: $114 more per month.
Break-Even Point = approx. 70 months
Another issue to keep in mind, is during those “70” months, it’s (statistically) a virtual certainty the homeowner will;
A) Refi to a lower rate and/or to get cash out or get rid of the monthly PMI
B) Sell and “move up / down”
C) Have a life-changing event which includes job change/transfer or loss
D) Death of a relative (inheritance)
E) Divorce
My point is this: In a fast-changing world, 70 months is a long time!!
Why should the buyer have any “skin” in the game? They shouldn’t!
In Conclusion
Being able to have simple conversations with your buyers regarding interest rates – will lead to more and more meaningful discussions about homes and the overall real estate market.
And those conversations will put commission checks into your bank account!
