When you apply for a loan there are a number of factors that play a part in determining the actual rate you will pay. Regardless of what a lender quotes on mortgage rates, lenders determine whether to loan money and at what rate based on the risk involved. This is known as the risk rate relationship.
So, how will you know what you will really pay for a loan? These are the factors that lenders look at to make their determinations and if the risk becomes too high, the loan will not be approved.
Loan amounts – conventional mortgages above conforming limits as set by Fannie Mae and Freddie Mac are considered jumbo loans and generally have a higher interest rate.
FICO score – the lowest interest rate is reserved for the highest score; the lower the score, the higher the rate the borrower will pay.
Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
Loan purpose – purchase transactions generally have the lowest interest rate with refinancing for better rates and terms being priced slightly higher. An even higher rate might be charged for refinancing and taking cash out of the property.
Debt-to-Income Ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
Property Type – some types of property are considered higher risk than others which could adversely affect the rate.
Loan-to-value – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.
Any combination of these factors could limit a borrower’s ability to secure a mortgage at the rate initially quoted. Give us a call today to get answers to all of your mortgage questions today.
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