How It Really Works
(Originally written for real estate agents, this is great information for the borrowing public. If you want to know why you aren't being quoted the rates currently being advertised, read this.)
Our company has specialized in manufactured home and land financing for nearly 25 years. One of the things we frequently hear from REALTORS® is, "Why are these loans more expensive?"
In light of the current issues affecting mortgages, I thought this might be a good time to discuss the elements of how interest rates get determined at the street level. There are so many components that affect rates that you need to at least be aware of them so that you don't inadvertently mislead a prospective buyer about what to expect. You run the risk of stopping the deal entirely if you act shocked by what the borrower has been told by the pre-qualifying lender when there are good reasons for the quote to be "above average". You need to know somethi ng about what causes a higher rate quote before you make any comment to the buyers that might scare them off.
Rule of Thumb: NEVER quote the average interest rate reported by FreddieMac on REALTOR.COM. That rate does not take into account what discount points were paid by the borrowers to come up with that average or any of the following factors that would affect your particular deal. Additionally, that rate is generally lagging by a least a week and will usually be terribly out of date by the time you see it.
Here is a list of items that affect the cost of a mortgage to the originator, along with the range of points that might be imposed on the price of the loan. These apply to ALL regular conventional loans. When I refer to pricing "hits", these are actually discount points being charged your lender by the agencies like FannieMae and FreddieMac. The higher they get, the higher the rate and upfront fees are likely to be. Increasing the rate to absorb some of these points are what causes the rate itself to be higher than "a verage" on some deals.
Property Location: Did you know that loans have different rates in Arizona than they do in New York? They do. There is no "National Rate".
Loan size: Most "standard" rates assume a minimum loan size of at least $200,000. As the loan gets smaller, the bank makes less money and starts imposing pricing hits. It varies by banker, but can be as much as 2.75% for loans under $60,000!
Property Type: This really affects manufactured homes and multi-unit properties the most. The minimum price hit for a manufactured home is about 1.25%. Some banks deduct as much as 2%. For a 3-4 unit property, the pricing "hit" might be as much as 1.5%. (FHA manufactured homes are now being hit at 1%)
Credit Score: This is a recent and very big issue. Under current guidelines, there is a .5% "hit" for a 719 middle credit score! This rises to a whopping 2.75% for a score of 619. Even FHA lenders have started penalizing borrowers with low scores.
Occup ancy: The standard pricing "hit" for an investor property is about 2.5%. There is generally no hit for owner occupied primary residences or 2nd homes if they are single family homes.
The important thing to note here is that these pricing hits are cumulative. If you have two or three of these items in the same loan, the rates are going to be higher than average and the fees probably will be as well.
For example, a manufactured home purchase with a loan amount of $65,000 and a borrower credit score of 660 would experience pricing "hits" totaling at least 2.75%.
A single family home, being sold to an investor with a 700 credit score and 10% down would still have total adjustments to the cost of the loan of 3.125%. A triplex being sold to the same borrower would be adjusted over 4.5%!
These adjustments to the resale value of the mortgage note result in the loan originator increasing the rate to increase the value of the loan. Loan pricing adjustmen ts in these ranges may exceed the amount that can be absorbed by the lender as a result of increasing the rate.. When that happens, discount points begin to "creep" over to the borrower's side and become part of the closing costs. This does not mean the lender is gouging your client! You need to understand this completely before trying to give advice to the buyer about the loan quote. Have a frank discussion about the proposed deal with your lender. They should be able to tell you exactly why this customer is not getting the rate being advertised on the current radio ads. (Any honest mortgage company will be happy to explain it to the applicants as well.)
Jon Laird is co-owner of Sterling Mortgage Corporation, one of Arizona's oldest licensed mortgage brokerage firms. Sterling Mortgage Corporation has specialized in manufactured home loans for more than 23 years. Jon has more than 32 years experience in home lending and is a state certified continuing education instructor. He frequently teaches manufactured home financing classes for real estate agents renewing their licenses. To read more from Jon visit: http://www.sterlingmortgageloans.com
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