What’s Your Rate?

This is the first question I get when someone learns what I do for a living. As a mortgage planning professional I cringe at this question. I have never liked the fact that my industry has conditioned the general borrowing public to ask this question when they inquire about a mortgage. To ask it in the current market, the unsuspecting applicant is asking for trouble.

Since the implosion of many mortgage lenders and the private sector shirking the mortgage market since last summer, there have been many very important changes to how a loan is quoted. The headlines are scary. There are fewer loan programs left and credit scoring rules the mortgage industry. The major mortgage funding markets that exist at the moment are FANNIE MAE, FREDDIE MAC and GANNIE MAE. Within this market lurk many caveats to be understood by the consumer prior to getting a solid interest rate quote. No longer is it possible to pick up the phone and get a reliable quote unless you are able to access the lenders guidelines for what are known as risk based pricing adjustments and loan level price adjustments.

The government backed mortgages currently have the lowest interest rates on 30 year fixed rate loans. If your loan amount is above the government current limits, then you must rely on the private sector to fund your loan. In that case the lowest cost loan products are intermediate Adjustable Rate Mortgages with initial fixed terms of 5 or 7 years. To qualify for these loans however you must have high FICO scores, a sizeable down payment or equity along with adequate income to qualify. For this article I am putting the true Jumbo loan aside and will focus on the Government market.

The fact is the majority of homes purchased and refinanced fall into the category of the government loan arena. Finding out what the payment is within this arena is tricky and really cannot be accomplished without having your lender having reviewed:

1. Credit report and scores


2. Income documentation


3. Asset documentation


4. Appraisal of the property

There is no way around the fact that all four of the above will determine the terms of your new loan – you cannot guess at these in today’s market.

Why? Because of risk based pricing adjustments and loan level price adjustments. These terms are the reality and are set in stone. To stave off losses both FANNIE and FREDDIE have created a systems that compensates for the greater risk. FHA currently has adopted a similar risk avoidance system that is a little softer than FANNIE and FREDDIE. I will explain the impact on an interest rate quote in the world of FANNIE over two scenarios later in the article. FHA is up in the air as to whether the risk based pricing will continue or not. The Housing and Economic Recovery Act was signed into law on August 1st, 2008 (That was Bill H.R.3221). It will become effective on October 1, 2008 and it eliminates risked based pricing on FHA loans. However on its heal Bill H. R. 6694 authorizes risk-based insurance premiums for FHA mortgages. This is a perfect example of constant change in the mortgage lending industry.

LOAN LIMITS:

FANNIE MAE / FREDDIE MAC – Make up the conforming mortgage loan market that define the single family (1 unit and Condo) loan limit as $417,000; except in Alaska, Hawaii, Guam and the U.S. Virgin Islands, which are 50 percent higher than the limits for the rest of the country

FANNIE MAE / FREDDIE MAC (Stimulus Package) –if the loan amount is above $417,000, then it is a Stimulus or so called “JUMBO conforming” (only through December 31, 2008) – the loan limit varies by county go to: https://entp.hud.gov/idapp/html/hicostlook.cfm to find your counties maximum loan amount.

GANNIE MAE – Is the agency that insures FHA and VA loans with the full faith and of the Federal Government. FHA currently follows conforming loan limit guidelines including up to the stimulus package loan limits. The VA insurance program gives an eligible Veteran a certificate that is worth 25% of the loan amount up to $417,000 conforming limit on single family home. Therefore up to $417,000 loan amount no down payment is required. However a Veteran that qualifies can have a loan up to $1,000,000 putting a 25% down payment on the excess balance over the $417,000 of the purchase price – these are called Super Jumbo VA loans.

FANNIE Adjustments:

You are shopping around for a mortgage loan and look on the internet for current rates. You find there is a lot of variation between the lenders advertising. How can you get an accurate read on an interest rate? Let me tell you that you can’t - you need to find a professional you trust and apply for the loan. Here is why.

Example one:

$500,000 purchase price and you have 10% to put down that leaves you with a $450,000 loan amount request. This means you will have a Jumbo conforming loan with private mortgage insurance. Since it is conforming jumbo your rate is already affected higher than if the loan amount was $417,000 by about .25%. Now consider FICO score - you need a 700 to get a loan. If you don’t have this score you will need to put 20% down. This used to be accomplished with a second mortgage to make up the additional 10% needed. Good luck finding one in today’s market. So you find the second mortgage you will still have an additional .75 to 1.50 points added to the price which will increase your rate by a .25% to .375% over the Jumbo .25% already added. Another pitfall is if the property falls into a declining market county, then there may be an additional 5% down payment requirement.

Example two:

You want to refinance out of your adjustable rate loan into a fixed rate. You think your home’s fair value is $500,000 and you owe $400,000. Let’s assume 30 year fixed interest rates are advertised at 6.5%. Now you need to be aware that that rate assumes a minimum FICO score of 720; if your score falls below this level there can be anywhere between a .50 point to 2.50 point price adjustment. How this translates to rate is .50 point will equate to .125% higher rate, a 1.50 point adjustment will be .375% higher in rate and 2.5 point adjustment will be .625% in rate. So you could be looking at a 7.125% instead of the advertised 6.50%. We haven’t considered the appraisal - if that comes in lower than $500,000 you are going to need private mortgage insurance if available with your given credit score. Again watch out if you are in a declining market county another 5% cut in your loan.
There are many examples of why it is impossible to get a rate quote over the phone. The two examples above is just a sample. If you are seeking a mortgage use a professional and give them all your information and apply for the loan. Let the professional handle the job of finding you the best possible loan for your current situation and heed their advice. If you are worried about making a mistake in choosing the mortgage professional here are some tips you can follow before you meet with anyone:

1. Get a copy of your credit report and learn about Credit Scores – there is an entire section of my web site dedicated to this topic at http://www.prmibev.com -- request your free annual credit report at https://www.annualcreditreport.com/cra/index.jsp


2. Gather your documentation together – income documents (W-2 and Tax Returns last two years) know how much money you make in gross income


3. If you are refinancing look up your property online at http://zillow.com or some other valuation web portal – no this is not an appraisal but it will give you a quick indication of the value -- also check Assessment value of your home on your real estate tax bill or online – most of the time Zillow has this information updated.


4. If you are purchasing get a basic idea of the price of properties you are most interested in – go to some open houses and do some research. Target an area to learn how quickly properties are selling.

A good mortgage professional will have the tools to further educate you on mortgage options and also help you structure how to make an offer on the property with your real estate agent. In this market the sellers are very concerned about the sale falling through because of financing problems. Believe me if you are positioned with a realistic loan approval and understand how you want to structure your purchase agreement you will be in the best possible position to close on the home; but you need a team of professionals on your side to put this together – including a mortgage professional and real estate agent. If you need to refinance because of an adjustment in your current ARM, then get a realistic valuation of your home and get that credit report. You won’t be able to affect the value of your home but you could improve your credit score prior to applying for the refinance. Remember whether you are buying or refinancing the more you understand the current lending environment the better.