If you are one of the few potential home buyers that shop for a loan among several different lenders, you may have noticed that they do not all offer the same interest rate. In fact, the “costs” of each loan can differ greatly from one mortgage loan to the next.
Why would lenders offer very different terms to a borrower with qualifications that stay the exact same on every loan application filled out?
To help understand why lenders do this, let’s first take a look at why banks offer different rates to different applicants and then take a look into why they present different offers to the same applicant.
Why Lenders Set Different Rates for Different Applicants
The mortgage rate an applicant will qualify for is going to be different with each applicant. There are certain determining factors that go into the mortgage interest rate an applicant qualifies for. The largest determining factors are credit score, debt-to-income ratio, and the size of the down payment. Other factors play a role in determining what a lender will offer, but these hold the most leverage.
While one applicant may qualify for the lowest rate of just below 3% another may qualify for a rate of 3.5%. The loan term offers that a bank will present to an applicant are dependent upon their personal financial factors when applying for the loan. An applicant’s personal financial data tells a picture of the risk to lend them money from a lender’s standpoint. A lender offers a higher interest rate to a borrower they deem to be riskier to loan money to. A borrower with a low credit score, past due payments on credit reports, or one that will be taking on a higher debt-to-income ratio is seen as a higher risk and offered a higher interest rate.
Why Different Lenders Offer Different Rates to the Same Applicant
Each individual lender starts with a basic model that all banks use for assessing risk, these models are set by financial giants like Fannie Mae and Freddie Mac who purchase loans from banks after they are made. IF loans don’t meet these standards they will not be purchased. In addition to qualifications that are set as standards by big loan purchasing companies, each individual lender is able to set their own standards above and beyond those already set. So each lender will have their own particular model for assessing an applicant’s risk to loan money to. One lender may be more interested in credit score while another believes debt-to-income ratios to be more important when considering what they will lend out, while yet another lender feels that the size of a down payment is more important. These are called mortgage overlays, the specific rules a lender sets on their own above the standard.
The type of loan offered also makes a difference in the interest rate offered. Lenders will put a higher rate on a mortgage with a longer life term. For example, a 30-year loan will most often have a higher interest than a 15-year loan. A zero down loan program will have a higher interest rate than a traditional conventional home loan as well.
In addition to looking at the interest rate, borrowers should look at all of the costs and fees associated with the loan to determine the true overall cost of the loan and what is the better option.
Working with a mortgage broker helps lenders to see all of their options in one place and allows them to ask a trusted professional about the options of each loan in one convenient place.
For more information on your mortgage options in Mission Viejo and surrounding areas please contact me any time.
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