Who Gets the Lowest Mortgage Price?

May 16, 2005, Revised January 21, 2011

"Is there an optimum combination of loan features that usually commands the best prices, year in and year out, over a variety of products?"

Yes, the following combination of borrower, property and transaction features commands the lowest price. Deviations from these features result either in a higher interest rate, more points, or tighter eligibility requirements such as a larger down payment requirement. For convenience, I will use the term "higher price" to mean any of those possibilities.

Borrower is a US citizen or a permanent resident alien. Non-permanent resident aliens, who are employed in the US but only temporarily, will pay more while non-resident aliens will pay the most.

Loan will be used to purchase or refinance a home that the borrower intends as a permanent residence. Loans to purchase second (vacation) homes, or properties to be held as an investment, will be priced higher. Refinancing to raise cash, termed "cash-out refinancing", is also priced higher.

All co-borrowers intend to occupy the property.
If one of them does not, it is a negative that could raise the price.

The loan has a first lien against the property and there are no other liens. Second liens are priced higher, and a first lien on a property with a second lien on it might also be priced higher.

The property is a detached single-family home. Loans secured by two, three and four-family homes, by attached homes ("duplex", "triplex" or "row"), or by manufactured (factory-built) homes, could be priced higher. So may units in condominiums, cooperatives or planned unit developments.

If the loan is fixed-rate, the term is 10 or 15 years. Prices of 30-year loans are higher, and 40-year loans are priced higher yet. 20 and 25-year loans are typically priced between 15s and 30s. After the financial crisis, 10-year terms were priced below 15s.

If the loan is adjustable rate, the initial rate period is 3 or 5 years. The term on virtually all adjustables is 30 years, but lenders prefer those with short initial rate periods.

The borrower will put at least 20% down.   In general, the down payment required to qualify for the lowest price was much higher after the financial crisis than before. For a borrower with weak credit, it could be 40%. Smaller down payments result in either mortgage insurance or a higher interest rate.

The loan is smaller than the maximum eligible for purchase by Fannie Mae and Freddie Mac. This "conforming loan limit,"  was $417,000 in 2011. However, because it costs lenders as much to originate a small loan as a large one, loans below some threshold, often $50,000 or so, are also priced higher. After the financial crisis, the agencies received emergency authority to purchase larger loans up to $729,750, but they are priced higher.

The borrower intends to close the loan shortly. A short period to closing means that the borrower needs only a short lock period, which is less costly then a longer one. The longer the lock period, the higher the price.

The borrower escrows taxes and insurance with the lender.  Borrowers who opt to avoid escrow will pay more.

The borrower's income and assets are fully documented. Before the financial crisis, there were several types of  less-than-full documentation that were priced higher, but after the crisis, full documentation became the rule.

The borrower has a credit score equal to or above the score required by the lender for the best pricing on the specified type of loan. These required scores were significantly higher after the financial crisis than before.

The ratio of total housing expense to borrower income is below the maximum for the loan program. Higher ratios may raise the price, or disqualify the borrower altogether.

How much any deviation from the optimum package of features will cost you usually depends on the other features of your package. If you have good credit in particular, deviations from the optimum package will cost much less than if your credit is shaky. But the price penalties for all deviations were much larger after the financial crisis than before.

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