As a loan originator working with clients everyday I am often asked, “what’s your best rate” about 30 seconds into every conversation. So I thought I would take a little time and answer this ever-eluding question.
Around 1934 the government established the Federal Housing Authority. Their single purpose is to provide insurance to lenders so that low-income families could afford homes. Prior to FHA, your daddy had to know the banker or you had to have 20% down, no exceptions.
Fannie Mae and Freddie Mac agencies soon followed. Each of these agencies are designed to guarantee your mortgage up to 80% of the value of the home to the lender. Once you meet these agencies criteria for a loan your loan is “insured” and you have very little risk to the bank. Lower risk gets the best interest rates.
An interest rate is nothing more than an assignment of risk by the lender. Meaning, the riskier your profile looks the higher your rate. Many moving parts are considered in determining your risk profile such as: income vs. debt ratios, loan to value ratios, credit scores and much more.
Once you meet the guidelines of one of the three big agencies (conforming loan), FHA, Fannie Mae, Freddie Mac the money (interest rate) that you borrow should be the same from lender to lender. All lenders buy “conforming money” for about the same price. The difference from lender to lender will be their profit margin added to the rate.
This being said, each of these conforming agencies has a New York phone book full of guidelines and procedures. Asking a new loan officer in the first thirty seconds “what’s my best mortgage rate” will most likely yield you the wrong answer. The rates will either be too conservative or too unlikely, but wrong none-the less.
The largest challenge of quoting a correct mortgage interest rate is how well the borrower can document everything they are putting on the loan application. Remember the New York phone book? Underwriters calculate income, assets and just about everything you can imagine differently than normal people. Their job is to be conservative.
They will and will not accept some documents as proof and every agency is different in it’s own way. Some borrowers write a lot of expenses off on their income taxes, some haven’t even filed for last year. What you may think or know about your financial worth may mean nothing in the eyes of the underwriter if it is not proved to her by the rules dictated in the phone book.
If you are really interested in getting your best mortgage interest rate, take a few minutes when speaking with the lender. It does truly take a few minutes to accurately calculate an interest rate. Too be 100% correct it usually will involve that you send in a few documents. After all, misquotes and mistakes will never favor the borrower, only the lender.
In closing, when asking for interest rates always remember to ask for the par interest rate from the lenders. The par rate is the cost of money for lenders. When shopping mortgages always find out what they consider to be their “par” interest rate for equal comparisons.