Shopping for a mortgage rate has just become a bit more difficult.
In 2008, both Fannie Mae (FNMA) and Freddie Mac (FHLMC) created and implemented Risk-Based Pricing Overlays that affected a borrower’s mortgage interest rate. These overlays, also known as Loan Level Price Adjustments, used credit scores, Loan-to-Values, and property use to calculate Fannie’s and Freddie’s perception of loan risk. The higher the perceived risk, the larger the pricing adjustment.
On January 12, 2011, FNMA and FHLMC increased their Loan Level Price Adjustments to reflect what they perceive as the increased risk in today’s lending environment.
How will this affect today’s mortgage borrower?
When shopping for a mortgage, most lenders out there advertise their rates as pure vanilla. These generically advertised rates do not include any Loan Level Price Adjustments and apply only to the cleanest of transactions with no perceived risk. In order to get a truly accurate rate quote, a lender needs to run your credit and obtain your credit scores. Unfortunately, well-qualified borrowers, unfamiliar with what FNMA and FHLMC consider as risk, may be in for a shock.
In 2010, the average credit score of U.S. consumers was 668 (according to CreditKarma.com and The International Association of Credit and Collection Professionals). With these new overlays:
- The average consumer with this score, purchasing a house and putting 25% down, would incur an adjustment of 1.25pts!
- This same borrower putting only 20% down would incur an adjustment of 1.75pts!
- In fact, even the best borrowers with a pristine 800 score would still incur a .25pt risk adjustment if their down payment was only 20%!
- Purchasing a condo, coop, 2-4 family house, or investment property? Be prepared to pay even more.
What about those borrowers with below average credit scores? Well, let’s just say things start to get pretty ugly.
It should be noted that not all lenders and loan programs have instituted all of these overlays and there are circumstances where they might not apply. In addition, most borrowers will have the option of building these overlays into their interest rate. But you won’t know this by comparing interest rates online or by talking to that knucklehead salesperson at the local bank – until it’s too late.
If you want excellent advice and accurate quotes, both tailored to your specific needs and transaction, make sure you work with a qualified and competent Mortgage Planner. Only then can your loan be structured to take advantage of the lowest available interest rates while ensuring your mortgage accommodates your cash flow needs and financial goals.
Warren Goldberg is a Mortgage Planner and published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. His newsletter is read by almost two thousand subscribers.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.