I get this phone question a lot. “Hi, I’m Bob, and I’m through Somewhere, Texas and I want to know exactly what today’s mortgage rate is? ”
It’s a good question. How are usually rates calculated and why might someone have a different rate compared to another person-even f they have identical credit scores? Some people think home loan rates are only based on credit scores however it today’s post I’d shed some light for the other factors banks use to determine your home loan rates.
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How are mortgage rates calculated?
Short Answer: The current financial market conditions and the loans general risk determine the mortgage price.
If today’s mortgage rates have been in the 4% range (like immediately after 9-11) you’re going to get a better rate than right now when rates are in the particular mid-6%. This is an example of how the common market conditions affect rates. I really could go into how mortgage rates are usually priced according to the mortgage-backed bond market but that’s too technical for now
So , in a nutshell, the two major aspects that determine rates are the current economic market conditions and the risk of the loan.
Notice how home loan rates go up when we have optimistic economic news and down whenever we have negative economic news. This isn’t always true but it’s a good rule of thumb. This is why working with an experience home loan person is so critical. If your mortgage person just gives you a rate with out doing his/her homework there’s a danger in the loan not going well-especially in today’s market.
Inexperience loan officers (such bank loan officers who aren’t licensed) just give you rates-but rarely understand things like “Is this a good time in order to lock the loan or need to we wait to lock. inch Would they even know what economic situations might arise that could raise or lower your rate. Usually not. An event mortgage professional will let you know can be happening in the mortgage market considering that any sudden increase could cause your payment to go up unrepentantly. This is especially for jumbo home loans where ever. 25% stage might represent $100 higher transaction.
How are mortgage rates computed?
Long Answer: Banks price home loans according to the overall risk of the mortgage and there are 5 major classes to consider.
The Basic Steps to qualifying for any home loan.
Job: How long you’ve already been on the job? For example , a person who simply started a job in a new career is considered higher risk than a person who is had the same job for 25 years. Most banks want to see a 2 calendar year employment history.
Credit score: I’ll get into this in more detail later, but most banks want to see a 620 rating. Once upon a time, you could get a 100% home loan with a 570 -but those days have passed away for now. Now banks want to see the 620 score or you’re putting 20% down. Why is 620 the wonder number-because the PMI companies is not going to insure a loan over 80% with no 620 credit score. Remember, PMI is applied to loans that exceed 80 percent loan to value.
PMI: Every time you see a market-wide change in financing it’s usually because of the PMI companies. For instance , when banks lower or raise the general loan criteria, what’s actually happening are the PMI companies are increasing or lowering their guidelines and the banks are simply following suite. Among the little-known secrets about the mortgage marketplace is how big a role PMI businesses play. They are major driving pressure behind bank’s lending guidelines. Discover how Jim Cramer of Crazy Money always seems to segway in to PMI companies when he’s talking about the mortgage market.
Remember, whenever 100% loans went away for most store banks? Now you know why-PMI companies stop insuring these loans so banks stopped offering them. And uninsured loan is a higher risk loan. And because banks only want uninsured loans for the high credit score borrower-usually an exit by the PMI organization causes and exit for the banks.
By the way, as a mortgage broker, I still offer 100% home loans but in the form of an 80/20.
Debt to earnings ratio: This is as a biggy! This really is as big of an issue otherwise you credit score. It’s also known as “Debt Ratio” “DTI or “DR” This is the percentage of your income over your debt. For instance , if someone makes 10K and they have 5K in basic debt they have got a 50% debt ratio. Most banks like to see a 40-45% financial debt ratio.
One of my little dog peeves is when someone calls me and asks “what’s your rate-I have excellent credit scores. ” “Great, but what about your Debt to income ratios” is my typical response. Because a teenager can have a good 800 credit score, but can they buy a home? No . Why-because they general shortage the income usually.
This is why best mortgage people insist on getting a full application. Mortgage people don’t inquire you all these questions because all of us like to spend money on credit reports and like taking the getting pay stubs, etc . It’s because when we issue approval letters of approvals we want to make sure the loan goes to funding without any problems
Loan to Value Or “LTV: This simply is the ratio of the value of the home to the loan amount. For example , if you’re purchasing a home worth $200, 000 plus you’re putting down 5% lower your LTV is 95%–since you aren’t putting 5% down. In general, banks like 3-5% down. But the greatest rates are on 20% down.
Therefore , in general, one’s debt to revenue ratio, job, PMI and Loan to Value (LTV) and credit rating determine if you can truly buy or refinance a home.
Now that we have the basic 5 discussed, let’s address the entire risk of the loan and how these factors drive the loan rate.
Employment/Income Documentation: Ever hear the phrase, “Show me the Money!! “? Well, when buying or refinancing banks want to what you make but they also care how you are compensated. Are you a w2 or 1099 type of employee? Are you self-employed or even can you give me tax returns to document your income? The safest loans-at least in the banks eyes– are w2 employees. Why-because these loans are fully documented loans– “Full Doc”-and these loans statistically have the least expensive foreclosure statistics.
The less the bank documents one’s income the higher the chance. And remember, the higher the risk the higher the pace.
Most of the foreclosures we’re experiencing right now came from the 100% loans where the bank didn’t require income documents. They simply took the patient’s word for it! And now banks are paying dearly for it.
However , just because someone can’t document their earnings this doesn’t make them high risk. Most a sole proprietor people can’t document all their earnings since they have business expenses they generally deduct.
So when I can’t document the client’s income, the bank usually will allow the loan approval-they just need this client to put 5-10% straight down. And, you guessed it, banking institutions charger a higher rate when I can’t document all the clients’ income (since these loans have higher risk. )
Sometimes this income documentation rule goes too far in my opinion. I remember working with a physician who made 200K as a medical center employee but recently started his own practice where he was guaranteed 400K for the next two years. Could I do his loan? NOPE! Why-because the lender would NOT give any value in order to his new, 1009 self-employment revenue unless I could show a two year history.