Bloom's Blog

Mortgage Rates and Apple Pie... a-la-mode is often necessary.

Three important slices

Residential property borrowing strength can be thought of like a juicy fresh apple pie, some better than others. Qualifying is determined by both the size of the pie and how palatable it is. It’s divided into three important slices including:

• Your credit (FICO score – higher is better)
• The loan amount to value of property (LTV – lower is better)
• Your income and assets relative to debt (higher is better)

Some individuals have a great big tasty pie with even slices. These borrowers can pretty much borrow without hassle and little cost, sitting back satisfied and happy. Others have only a bite-sized, single slice, resulting in high lender risk and borrowing difficulty.  They are left wanting more. The majority of people fall somewhere in between. They have ample pie size and fairly even slice size, but require some vanilla ice cream to make it just a bit tastier.

What to watch out for

When you hear mortgage rates quoted, they are generally for borrowers with a marketable pie: excellent credit, high equity and fully documented income to support all their debt. Most mortgages are sold on the secondary market so the pie needs to be as tasty as possible. When credit is only fair, equity is low or income not able to be substantiated, then rates move up based on the increased risk in each area. This less than perfect pie is covered with a hunk of ice cream [higher rate] so it’s more attractive to investors on the secondary market.

Beware of a common “gotcha” when shopping for a loan and terms. The lender assumption is a “perfect pie,” or borrower profile. At the point when your loan is finally in underwriting, often the bad news comes… different terms because some aspect of your profile wasn’t quite good enough and some ice cream is necessary to make it more appetizing. A good broker will be honest up front and quote a rate based on your true profile (at the risk of losing a client to a “better” initial quoted rate).

Compensating slices

The good news is a big slice in one area can help compensate for smaller one of the remaining two. For example, a borrower can still refinance even with a FICO score of 500 if their equity stake is 35% or better. The lender’s risk of a borrower’s poor credit is mitigated by the collateral in the home. If you are in between jobs with NO income, but have a FICO score of over 720, a loan is still possible because you may qualify for a “no documentation” loan. The credit score demonstrates responsible borrowing habits over time and a likelihood of continued behavior in the future.

Generally speaking, the best rates are quoted for a “conforming loan”: one less than $417,000 with an LTV of 80% or less, a FICO of at least 680 and debt to income ratio of less than 40%. If a deviation exists in a negative direction, it results in a higher note rate. A “Jumbo” loan (greater than $417,000) is typically ¼ percentage point or more higher than a conforming loan rate. Starting with the perfect borrower profile, the lender applies ice cream in sufficient quantities to cover up the blemishes, ending up with a rate that tastes good to their investors.

Lender Rate Sheets

Rates are not arbitrary. Every lender sets its underwriting criteria based on its investor expectations of return and risk. Rate sheets are like an al-la-carte menu. As a broker, we start at the base amount established each day by each lender and then add or deduct basis points from the note rate based on the borrower’s FICO, LTV and documentation type. The resulting rate quoted is always a good faith estimate but subject to final underwriting subjectivity.

Since loan rates are based on a complete borrower profile, getting a quote before actually filling out a loan application and pulling credit is meaningless. Know that “quick quotes” are designed to capture your interest and likely to change unless you are one of the relatively few borrowers that fit conforming criteria with an award winning pie. The rate you will pay is only fixed when a “loan lock” commitment is made AND underwriting conditions for funding have been met. Before that, your rate is subject to change and NEVER guaranteed. If your pie isn’t served a-la-mode, be aware as most need at least a little ice cream to satisfy.

Any questions about qualifying with today’s rates, or about rate modifiers, can be directed to my attention. Please don’t hesitate to contact me.