Advertisers always promote their low price leader items to get customers in the door. This is effective at getting people into the store to buy what they need, which usually differs quite a bit from what they came in to buy. Cars advertised by auto dealerships are usually the base models with the fewest options so that the price and payment advertised are the very lowest. Carpet shampooing businesses advertise their rate for one room hoping when you see how wonderful it looks you’ll go for the whole package with Scotch Guard and all. Full service car washes advertise the basic wash price than sell value-added add-on’s like hot wax and Armorall’d interiors.
Mortgage interest rate advertising is much the same. Lenders, banks and credit unions always advertise the best-case scenario for rates. What is the best case scenario? It’s one where no “risk-based pricing” exists. This scenario is:
- 740+ FICO score
- 80% or less loan-to-value
- Purchase transaction
- Single Family Residence
- Owner Occupied
Any deviations from this scenario could result in a higher actual mortgage interest rate for the borrower, depending on the loan program. Lower credit scores and higher loan-to-value on a property represent higher risks to Wall Street investors backing the banks, credit unions and lenders, therefore they try to minimize their financial exposure by increasing rates for these scenarios.
Also, some programs have bigger “hits” than others for the same “risk”. For instance with Conventional 30-year fixed mortgages from Fannie Mae and Freddie Mac the interest rate increases for FICO scores lower than 740, and increase more and more for about every 20 points lower you go. FHA and VA don’t have any FICO score risk-adjusters from 850 all the way down to their minimum allowable.
Conventional Fannie Mae and Freddie Mac loans have higher interest rates for higher loan-to-value ratios and rates get a little better for LTV‘s lower than 60%. FHA and VA have no hits to rate for LTV up to their maximum (96.5% for FHA and 100% LTV for VA).
This is why many times the rate quoted to you may be different than the rate advertised. It all depends on the borrower’s particular credit and property qualifying. And sometimes one loan program may be better for your particular situation than the one you originally thought you wanted or needed.
Contact me with any questions you may have. I am more than happy to explain all the variables and help you choose the right loan for your personal situation.