Why Can't I Get That Rate?

"Why can't I get that rate?"

Unfortunately, we may hear this question more frequently in the coming months. Fannie Mae and Freddie Mac have recently announced changes to their "Loan-Level Price Adjustments". This risk-based pricing model has been around for awhile but the GSEs are about to take it to another level.

Lenders publish rate sheets daily (often multiple times a day). When a loan officer is pricing a loan for a client they have to take into consideration other factors such as credit score, Loan-to-Value, loan purpose, property type, etc. Each of these factors can effect the pricing, and usually in a negative way.

For example, someone with a 700 credit score wishes to refinance their primary residence at a loan amount that leaves them with 20% equity. Not only are they paying off their current mortgage, but they are also accessing another $20,000 for some home improvements (thus making this a "cash-out" refinance).

Let's add up the pricing adjustments on this 30 year fixed mortgage: First, there is a hit to the price of 1.000% for having a score of 700 (which isn't all that bad, by the way) and because it is a cash-out refinance there is another hit of .75%. Now, if the home happens to be in an "adverse market" there is another hit of .25% to the price.

Now thankfully these adjustments are not to the "rate", however this 2% in price adjustments can easily increase the available rate by .375%. On a $200,000 loan that extra .375% costs the homeowner an extra $44.57 per month. Over thirty years that is an extra $16,045!!!

Even a borrower with an 800 score and 20% equity gets hit with a .25% price adjustment. That is just plain unfair.

Unfortunately Fannie and Freddie have taken a model that is supposed to reward quality (low-risk) borrowers and made it one that punishes ALL borrowers but only punishes the best borrowers a little.

Homeowners and prospective homebuyers must make sure that a qualified loan officer provides an accurate rate quote based on all of the qualifying criteria BEFORE committing to the borrowing process. I always review several options to insure that the best financing is made available.

At Home Lending Source, we've not yet imposed these new pricing adjustments but they certainly will be in effect by April 1. Rates are still very attractive so I recommend calling NOW to research your best options tailored specifically to your situation.

You can read more about LLPAs here:
http://themortgagebuzz.com/2011/01/06/