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May 16, 2005
"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.
The loan has a 15-year term. 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. 10-year loans, if available, are likely to be priced like
15s, or slightly lower.
The borrower will put 20% down, or more. Smaller down payments result
in either mortgage insurance or a higher interest rate. The following categories
are widely used in pricing: 20% and over, 15-19.9%, 10-14.9%, 5-9.9%, 3-4.99%,
0%, -5%, -7%. A negative down payment means that the loan amount exceeds the
property value.
The loan is smaller than the maximum eligible for purchase by Fannie Mae and
Freddie Mac, which was $359,650 in 2005, but not too much smaller.
Since it costs lenders as many dollars to originate a small loan as a large one,
loans below some threshold, often $50,000 or so, will be priced higher. Loans
larger than $359,650, called "jumbos", are also priced higher because they can�t
be sold to the agencies.
The borrower intends to close the loan shortly and therefore needs to lock the
terms of the loan for only 15 days. Other common lock periods are 30,
45, 60, 75, 90 and 120 days. The longer the period, the higher the price.
The borrower agrees to maintain an escrow account with the lender, who will pay
taxes and insurance as they come due. Borrowers who opt to avoid
escrow will pay more.
The borrower's income and assets
will be verified by the borrower�s
employer and bank. Other forms of documentation will be priced
higher, depending on the form. These range from minor deviations from the
standard, as when the borrower wants to submit pay stubs and bank statements; to
stated documentation where the lender accepts what the borrower tells him; to no
documentation at all. The larger the deviation from standard documentation, the
higher the price.
The borrower has a credit score equal to or above the score required by the
lender on the specified type of loan. Borrowers with scores below the
required score will pay more. The required scores usually run from 720 to 740
(out of a possible 850) but I have seen them as low as 680 and as high as 780.
The borrower will accept a prepayment penalty. Borrowers who don�t
accept a penalty will pay a higher price. Borrowers with low credit scores,
however, may find that a penalty is a requirement of their loan.
The ratio of total housing expense to borrower income is below the maximum for
the loan program. Higher ratios may raise the price.
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.
Copyright Jack Guttentag 2005
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