Why Is His Loan Lower Than Mine????

Many people ask  why is my friend (his) loan  lower than mine.

When a borrower is shopping interest rates for a home loan the two most important factors will be the loan to value and the borrower's middle credit score. The lower the loan to value and the higher the credit score the better the interest rate will be. Obviously, this is because the risk factor is less to the lender when the borrower is putting down more and has excellent credit. If the borrower has a small down payment and lower credit scores then the interest rate will be higher.

When lenders close the loans and put them into mortgage-backed securities they sell them off usually to FNMA and FHLMC. These two agencies have pricing adjustors that are either added or subtracted to the price of the securities they are buying. The adjustors are to compensate investors who buy the securities for taking on additional risk.

The most common items adjusted for are: loan to value, credit score, occupancy type and type of property. The areas of low risk are large down payments, high credit scores, owner occupied properties and single family homes. Areas of high risk are small down payments, low credit scores, investor loans, condominiums and units. As an example the interest rates, with no points, for purchasing a single family home with 20% down, a loan amount of $417,000 and owner-occupied please note how the rates change for every 20 point change in the credit score:

640 = 5.500%, 660 = 5.375%, 680 = 5.250%, 700 = 5.125%, 720 = 5.00%, 740 = 4.875%

In this same example if the borrower put down an additional 5% the interest rate in most cases will improve by .125%.

When an investor (non-owner occupied) wants to buy a single family home with 20% down with a loan amount of $417,000, credit scores will also affect the interest rates.

740 = 5.500%, 680 = 5.875%

If the investor puts down an additional 5% the following applies:

740 = 5.25%, 680 = 5.500%

That is why when borrowers are shopping for a home loan they often say, "My friend just got a loan and the interest rate was lower than what the lender is quoting me. Why is that?" We have to explain the above not to mention the fact the interest rate market changes day to day.

Tim Lorenz

Instant MLS Listings & Free Market Analysis

"We have actually closed many short sales!"

http://www.markandtim.com/

949-282-2521

Tim Lorenz . Over 40 Years Experience Representing South Orange County Home Buyers, Sellers, Investors and Relocations!