Working in a mortgage brokerage, I receive phone calls all the time from rate shoppers asking, “What’s the rate on your best 30 year fixed mortgage?†Unfortunately, many brokers will just spout off a rate without asking any questions—which makes the rate meaningless.
The truth is, no mortgage broker can tell you what your actual rate will be until you both sit down and answer the following questions:
1. What is your credit score? Lenders not only need to know your credit score (usually the middle of the three scores obtained from Experian, Transunion, and Equifax), but also if there have been any collections, bankruptcy, consumer credit counseling, or judgments.
Also most lenders need a minimum of three trade lines. A trade line is anything that shows on a credit report such as a mortgage or credit card. There are also requirements for each trade line such as the length of time the trade lines have been open and active and the minimum/maximum balance. And if you’ve never had a mortgage before and are a first time home buyer, that will affect your rate as well.
2. What type of mortgage is it? Is it a purchase mortgage, a rate and term refinance, or a cash-out refinance? Each one will carry a different rate.
3. What is the loan-to-value? This is basically the loan amount versus the value of the home. On a purchase, it is based on the purchase price. So if you are putting 5% down, then your loan to value or LTV is 95%. On a refinance, this is based on the appraised value. If your home is worth $100,000 and you are doing an $80,000 refinance, your LTV is 80%.
4. What state is the property located in? Many lenders work in different states and different states can have different rates. I work in both Oregon and Washington, so this is a question I have to ask.
5. What type of dwelling is it? A single family residence will have better pricing than a condo, mobile home, or multifamily unit such as a duplex, triplex, or fourplex.
6. What type of occupancy? Is the home going to be owner occupied, a second home, or an investment property? Owner occupied homes have better rates than investment homes.
7. Are you OK with a prepayment penalty? If so, how long? There are two types of prepayment penalties: hard and soft. A hard prepayment penalty means that if you refinance or sell the property you’ll be subject to a penalty equal to 6 months interest of the balance. A soft prepayment penalty allows you to sell, but not refinance.
Some loans don’t have a prepayment penalty, others have a combination of soft and hard, and still others just have one or the other. I have seen prepayment penalties lasting anywhere from 1 to 5 years. Having a prepayment penalty can sometimes yield a better rate.
8. Do you want impounds? Having impounds means that each month you send in your property taxes and insurance to the lender instead of paying them yourself when they are due. Impounds will usually give you a better rate but you’ll have to pay more upfront during closing. Read more about loan impounds.
9. What “doc type” is your loan? This refers to the type of documentation that the loan will be submitted with. Will your loan be full doc, stated doc, or no ratio? Most people don’t know the difference and won’t know which one they’ll need until they run their application past a loan officer who can tell them which way to go.
10. Are there any upfront points? A loan officer may be quoting you a 6% rate over the phone, and fail to mention that you are required to pay an additional 1% up front to buy the rate down.
11. Is the quoted rate a “teaser rate†or “neg am rate”? Sometimes lenders will have a low teaser rate which is only fixed for a few months. Other times they will quote a rate which is less than the actual fully amortized rate, meaning you will go negative each month causing your loan balance to go up instead of down. You may have seen ads mentioning a one, two, three, or four percent rate. Those aren’t fully amortized rates and you will go negative each month.
My recommendation is to find a good, professional loan officer that you can trust and stick with them. If you’re rate shopping, understand that no loan officer can give you an accurate rate until they have taken a complete application and answered the above questions and probably a few others as well.
Also, rates can change everyday (sometimes even several times a day) so if you’re shopping around yourself you’ll see fluctuations just from that alone. As a final note, beware that many unscrupulous lenders will say whatever they think you want to hear over the phone just to get you in the door. Get it in writing first!
And feel free to contact me if you’d like to know the real rate you can qualify for.
Chelsea Collier is a licensed home mortgage specialist in both Oregon and Washington, as well as a frequent contributing writer for OHM. Please don't hesitate to contact her with any questions you may have about financing (or refinancing) your home.
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