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Online Mortgage Rates vs. Reality

Why is there a difference?

· mortgage rates,credit score,conventional,first time homebuyer,real estate

You are looking to buy a home and ready to begin your online research. What are the steps? What is the timeline? You've even checked the average going interest rate with some online rate quotes. You feel super confident that you have a feel for what is about to take place. You decide on a local mortgage company (hopefully ME-insert smiley face emoji) and complete your application. However, the loan officer sends you an estimate with a rate that is higher than what your online research found. What gives???

In a word (or phrase) …. Loan-Level Price Adjustments (LLPA’s).

Loan-Level Price Adjustments apply to Fannie Mae and Freddie Mac loans (Conventional loans) and are essentially added fees charged by Fannie and Freddie to compensate for certain risk factors inherent in the loan characteristics. Even though LLPAs are costs, they are not passed on to the borrower as a fee, per se, but instead these costs are factored in and returned to the borrower as a higher interest rate. The LLPAs “hit” for items such as:

  • Credit score
  • Occupancy type (i.e.-Investment)
  • Property Type (i.e.- Condo, 2-4 unit, etc)
  • Loan-to-Value
  • Loan Purpose str(Cash Out Refi vs Purchase)
  • Additional Subordinate Financing (i.e.- Second lien on top of a First lien)

There are very few scenarios which avoid LLPAs altogether. One scenario is when a borrower with a credit score over 740 purchases a single-family, detached home with a down payment of 40% or more with no subordinate financing. Everyone else is subject to LLPAs.

Let’s run through a quick example.

  • Buyer #1 has a 740-credit score and wants an 80% loan-to-value. You can see from the chart below that the cost to the rate for this scenario would be .5%
  • Buyer #2 has a 620-credit score and wants an 80% loan-to-value. You can see from the chart below that the cost to the rate for this scenario would be 3%. That is a huge difference!

Just a reminder that the COST does not equate to the rate being increased by the same amount. These are costs for the rate which basically means as the cost increases, it eventually spills over to a new bucket which is the next highest rate.

The example above was only reflective of one LLPA. What if these buyers were looking to buy a condo or get a second lien? The cost for the rate would keep increasing with each risk factor.

Here is a link so you can check out all the adjustments for yourself! CLICK HERE!

You can bet the online rate quote you are seeing is the lowest possible risk category with as few “hits” to the rate as possible (tricky, tricky) and typically include a discount point which is buying the rate down. Think of it like an online dating profile picture!

These LLPAs do NOT apply to FHA, VA or USDA loans. These adjustments are for Fannie and Freddie Conventional loans only and they were a product of the recent Housing Crisis. Because the Agencies were losing money at a fast pace, they needed a method to offset the losses. The LLPAs were introduced in 2008 as the solution. The costs increase fees on “riskier” loans. By only charging fees associated with specific risk factors, this allowed the two agencies to not penalize the “safer” borrowers.

If you fall into the category of a borrower that has multiple “hits”, there might be another loan product out there for you rather than a standard Conventional loan. A knowledgeable and experienced loan officer can explain these different loan options as well as review the pros and cons of each product so you can feel comfortable knowing you are making the right decision.

As always, I’m here to answer any of your questions at any time.

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