Many years ago when I was just starting in real estate in Denver, I had clients who would shop interest rates and pick a lender based upon the rate quoted. More often than not, and in spite of my coaching, those rates would be for a 10 day close. That meant the loan had to close in 10 days or less to get the rate quoted. Normally, that did not work out, but after all the trials and tribulations of getting that initial approval, the borrower would stay with that lender. not always a pretty result.
Regardless of what a lender quotes on mortgage rates, the actual rate a borrower pays is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.
Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.
- Loan amounts – conventional mortgages above conforming limits as set by Fannie Mae and Freddie Mac are considered jumbo loans and generally have a higher interest rate.
- FICO score – the lowest interest rate is reserved for the highest score; the lower the score, the higher the rate the borrower will pay.
- Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
- Loan purpose – purchase transactions generally have the lowest interest rate with refinancing for better rates and terms being priced slightly higher. An even higher rate might be charged for refinancing and taking cash out of the property.
- Debt-to-Income Ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
- Property Type – some types of property are considered higher risk than others which could adversely affect the rate.
- Loan-to-value – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.
Any combination of these factors could limit a borrower’s ability to secure a mortgage at the rate initially quoted. Pre-approval by a trusted mortgage professional can be the best way to know what rate you can expect to pay. Please call for a recommendation of a trusted mortgage professional.
Currently I have 5 or 6 clients, who will be home buyers in Denver that are in credit repair, services that good mortgage companies offer to their clients in need of increasing their credit scores. Often procedures include new credit cards that are pre-paid, paying off small debts and closing some accounts. But honestly, just by following what I just said, you might not get the right accounts. So, to get the best rate, today or a year from now, do not go it alone. CONTACT me and I will direct you to a good lender that can help get you ready.