Getting a mortgage rate and price quote used to be a pretty
easy process. If you called around and provided a loan amount,
sales price, or estimated value of the house you were buying or
refinancing, then any credit score over 660 would get you a solid
rate quote. Now, risk-based pricing has made it more difficult
than ever to find the best mortgage rates.
It's the questions you don't ask at the beginning of the loan
process that could end up costing you thousands at the closing
table. The list below is a must-read if you want to make sure
there are no pricing surprises during your mortgage application
1. What kind of property are you going to buy?
Condominiums, manufactured homes, HUD Homes, and Fannie repos
may be priced much lower than that white-picket-fenced house
on the corner, but appearances can be deceiving. In most
cases, you'll pay a more substantial down payment, a higher
interest rate, and greater costs to purchase these higher-risk
Make sure you tell your mortgage professional if you're
considering purchasing anything other than a single-family
2. What are your credit scores?
Credit scores are the main driver of what your interest rate and
closing costs will be. For example, if you have a high
loan-to-value ratio and a credit score under 640, you'll have to
pay 3% of the loan amount to get the same interest rate as a
borrower with a credit score of 740 or higher.
Based on Fannie Mae's guide on loan-level price adjustments,
here's a quick rundown of how much your credit score could cost
you for every $100,000 you borrow, assuming you have at least a
25% down payment.
740 or higher:
720 to 740:
700 to 719:
680 to 699:
660 to 679:
640 to 659
620 to 639:
3. How much are you putting down?
Lenders want you to have more skin in the game than in years
past. If you aren't willing to save up the extra pennies to make
more than the minimum down payment, you will be considered a
higher risk and thus charged a higher rate. Government loan
programs like the Federal Housing Administration's and the
Veterans Affairs' have some flexibility, but they come with the
added cost of mortgage insurance (for FHA loans) and funding fees
(for VA loans). We're talking not only thousands of dollars added
to your loan, but extra monthly payments as well.
Make sure you get a side-by-side comparison of the all-in
payment for each option; don't base your decision strictly on the
rate you get quoted.
4. What type of loan do you need or want?
FHA, VA, conventional -- they all come with different rates,
mortgage insurance, and fees. For example, you may find that the
rate on an FHA loan with only a 3.5% down payment is lower than
the rate on a 5%-down conventional loan. The mortgage insurance
on that FHA loan is going to have a much higher payment, though.
Here is a quick breakdown:
- Lowest down payment: VA, 0%
- Lowest rates: FHA or VA
- Lowest payment: VA or conventional (VA doesn't have
mortgage insurance, and conventional mortgage insurance is
cheaper than FHA)
- Lowest fees: Conventional (VA has funding fees, and FHA has
up-front mortgage-insurance premiums)
5. How much do you want to borrow
Thanks to the "qualified mortgage" rule, a lower loan amount
pretty much always comes with higher interest rates. If you're
borrowing less than $125,000, don't be surprised if the rate is
higher than what you'd get quoted for a loan amount over
$300,000. Why? In its quest to ensure consumers are not
overcharged closing costs, theConsumer Finance Protection Bureau
put a cap on the percentage of your costs compared to your loan.
The problem is that many of the costs of the loan are fixed
regardless of the size of the loan. So if you have $1,000 in
lender fees, $1,000 in title fees, and $1,000 in origination fees
on a $100,000 loan, you'll be OK: The total fees don't exceed 3%
of your loan amount.
What if you want to borrow $50,000? Well, you have a problem,
because now those same fees represent 6% of the loan amount.
Lenders have two options: raise the rate so they can cover some
costs or simply refuse to lend less than $100,000 to avoid the
consequences of making nonqualified loans. The lenders who still
make smaller loans are doing so at higher rates. There is some
debate over whether the 3% fee cap can be exceeded on smaller
loan amounts, but for now, there will be a smaller pool of
mortgage banks willing to lend on smaller loan amounts.
6. How much do you make per year?
You may be eligible for down-payment assistance, closing-cost
grants, mortgage tax credits, and a myriad of other special
mortgage assistance programs, depending on how much you make per
This money is there for the taking, but oftentimes customers
simply don't ask about it or their mortgage professionals aren't
up to speed on what money is still available. Google "down
payment assistance" in your city, and you'll likely come up with
a boatload of options based on your income. You may also find
that for some programs, the income limits are much higher than
you expected. Be sure to call the bank that handles most of your
checking and savings: You may find out they have a closing-cost
grant or down-payment assistance program available to you just
for being a customer.
7. Will you buy this house as an investment property, a
second home, or a primary residence?
Appraisal costs run an extra couple of hundred dollars for
investment properties; rates are usually about 0.5% higher than
the rates for a primary residence.
You'll need at least 10% down to buy that second home -- and
20% to 25% down if you plan to buy investment property.
8. Do you want your payment to include your property
taxes and homeowner's insurance?
Setting up an "escrow" or "impound" account involves setting
aside some money so that your lender pays your property taxes and
homeowner's insurance as part of your monthly payments.If you are
opposed to having your money sitting in a non-interest-bearing
account to pay your property taxes and homeowner's
insurance, be prepared to spend an extra $125 to $250 for every
$100,000 you borrow. Keep in mind you
to have an impound account if you are putting less than 20% down,
have less than 20% equity in your home, or are getting a
government loan through the FHA or VA programs.
9. Are you a veteran/union member or a banking customer
with lots of accounts at your bank?
Special programs abound depending on whom you bank with, how much
money you have there, and whether you're a member of the armed
services, a veteran, or a union member. Be sure to ask the
mortgage professional at your local bank whether they offer any
specials for banking with them. You may find that you can get
cash back for an auto deposit, a grant for closing costs for
being in a particular income bracket, or an extra discount for
being a current or retired member of a union.
Make sure you ask any mortgage professional you talk to about
any special discounts they can access for your mortgage.
10. What's your home worth?
This is especially important for refinances. Make sure you call
your favorite realtor to give you a list of similar houses that
have closedwithin a mile or two of your house in the last 90
rely on those online automated value systems: They often pull in
all kinds of info from the past year, rather than the most
current sales. This extra diligence could save you $375 to $550
on an appraisal if the actual prices of homes sold recently are
lower than what you think your house is worth. The less equity
you have, or the more upside-down you are, the more you will pay
in rates and fees. If you aren't sure what the value is, ask for
a best-case/worst-case scenario based on the highest and lowest
sale you get from your agent.
If you haven't been asked any of these questions, there is a
real chance that the rate and fee quote you got is inaccurate.
Keep in mind that many of these pricing adjustments are
cumulative. If you forget to provide the information related to
even a couple of the questions, your cost could go up by more
than $3,000 for every $100,000 you borrow, and your monthly
payment could end up much higher than you were initially
This extra research makes finding the best mortgage rates more
time-consuming, but the thousands of dollars you'll save will be
well worth the extra time.
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