Wednesday, September 19, 2007

Factors That Affect Interest Rates

By now every consumer seems to know about the existence of FICO Scores...but what are they really? FICO Scores are essentially indicators of risk, that is, how likely you are to pay your mortgage on time and not go into default. The best way around the score game is if you qualify for FHA or VA or another government initiative designed for entry level homeowners. Naturally there are government caveats on these loans...subject of another blog. There are many factors that affect your interest rate:

FICO Scores affect rates and your borrowing power!
If you apply for a home loan with a FICO credit score of 720+ you will most often be offered the current lowest interest rate if you are able to fully doccument your income and assets and own or are refinancing a solid property. As a 'stated income' applicant with limited or no documentation, the required FICO scores have been raised in 2007 to 700 or better to qualify for decent rates, depending on the specific lender's guidelines. Many conventioanl lenders won't fund self employed borrowers with 'stated income/assets' at all.

It's best to discuss methods of documenting your income that may work for your situation with your mortgage planner. We find it hard to negotiate great rates below 620 FICO scores. Low to mid 600's is generally considered the Alt-A category offering moderately higher rates. Sub Prime Lenders (made famous this year) work with borrowers who have extenuating circumstances and FICO scores as low as 500 or who cannot document their work history or income sufficiently for a conventional loan. Many sub prime borrowers have excellent credit, just short work histories!

For comparison on a Fixed Rate Loan:
720+ FICO = 6.5% for full documentation of income and assets.
680-720 = 7.0 % for full documentation
620-680 = 8.0% for full documentation
540-600 = 10.0% for full documentation

Below 540: You will be charged even higher rates and may only qualify for 'hard money' and shorter terms. The difference in your monthly payments and cost of financing is pretty impressive and will mean the difference in how much house you can afford to purchase.

In addition, there are higher loan costs in points and fees for having sub-par credit. Generally, it's all about risk and the extra work necessary to get your loan closed.

Derogatory credit issues:
1. If you have a history of late payments with creditors within the last twelve months.
2. If you have fewer than three active lines of credit.
3. I you have filed bankruptcy within the last seven years (four years is fund-able with most banks)
4. If you have suffered an foreclosure in the last 10 years.
5. If you have unpaid collections or charge-offs within the last 2-4 years (depending on the lender).
6. If you have liens or judgements against your title.

Title issues:
Liens against a title must be paid off before or at closing to provide a 'clear title' for a lender. In the case of paying off an existing mortgage company, this is straightforward process handled by our escrow agent. In the case of unpaid collections expect additional interest fees or to pay them at closing. Also, if someone else is listed on your title (often in the case of divorce) you must secure a quit claim deed from the other party and submit your divorce or settlement papers.

Beware of adding your children on title. If they are over 18 they can cause serious credit liens without your knowledge by credit card abuse or other bad behavior. According to some states, children under 18 cannot be legally responsible to hold title to mortgages unless their net worth exceeds 2 million dollars.

Property issues:
1. If your property is zoned rural or agricultural over ten acres (some allow 50 acres).
2. If your property is in a flood zone, wetland or hazardous area.
3. If your property appraiser cannot provide three comparable property sales within 2 miles and six months.
4. If the appraiser's report reports significant damage or safety issues (legally they must note this) to the structure.
5. If a manufactured home is pre-1976 era, has been moved, or had additions to alter its structure... it is fund-able with very few lenders at very high rates.

Note: there are many other issues which individual lenders use to establish the rate they offer a borrower, based on their own portfolio of property and risk ratios. In fact, some lenders specialize in higher risk portfolios because they can charge more for the money. The more sub par issues you have on your Credit Report, the greater risk you are considered by a lender, and this is reflected in your score (read more about Credit Scores on previous blogs) As a result, up go the lender's requests for documents (conditions) and potential fees for underwriting and appraisal reviews. Not to mention your bank or broker will charge more for their time.

Now don't let all this talk about rates get you down. The most important aspect of a mortgage is your ability to afford one! Two main factors besides credit history affect your acceptance:
1. The Loan to Value (LTV) which means how much you are borrowing against a property's worth. If the LTV% is under 75% the rate often improves.
2. Your Monthly Payment or Debt to Income (DTI) is usually the kicker...i.e., how much can you afford to pay toward your housing cost every month.

Most lenders have great short term products to help you get a home loan or refinance for a year or three. These loans will help you improve your FICO score and you won't miss out on that wonderful new home at today's prices!

Happy borrowing! 

© 2007 susan templeton