Home | Ask Your Question | Mortgage Glossary
Find me a lender for:  

What Mortgage Market Niche Are You In?

What Mortgage Market Niche Are You In?

October 19, 2002

"I recently found what appeared to be the best deal on a 30-year fixed-rate mortgage from ads in the newspaper, but when I told the loan officer exactly what I needed, the price rose and the amount I could borrow fell. I figured he was pulling a bait-and-switch on me, and broke it off. Then I found an equally good quote by a mortgage broker on the internet, but when I contacted him the exact same thing happened�What's going on? I need the loan to buy a condominium to rent out."

You're befuddled by a unique feature of the US mortgage system that complicates life for mortgage shoppers. I call it "market nichification". It simply means that lenders vary the terms they offer borrowers based on a large number of loan, borrower and property characteristics that they believe affect the risk or cost of the loan to them.

Your case is an example. Lenders consider loans that are used to purchase a property for investment riskier than loans used to purchase a property that will be occupied as a residence by the borrower. To compensate lenders for the risk, these loans carry a rate about 3/8% higher than that on loans for personal occupancy. In addition, the maximum amount you can borrow on an investor loan is about 70% of property value as opposed to 95% on most loans for occupancy. While the precise figures will vary a bit from lender to lender, you will find yourself paying more and able to borrow less no matter which lender or mortgage broker you solicit.

Here are some other factors that could have the same effect. A more complete list is shown further below:

  • The borrower does not have permanent residency in the US.
  • There is a co-borrower who won't live in the house.
  • There will be a second mortgage on the house.
  • The house is a condominium with more than 4 stories.
  • The borrower wants to avoid tax and insurance escrow payments.

The number of niches is enormous because of all the different combinations of the features that define niches, such as those listed above. Software developed by GHR Systems, Inc., which many major lenders use to make pricing adjustments, allows lenders to enter up to 40 million prices for each loan program. A second loan program could have a different 40 million. While no one lender uses any significant part of this capacity, in combination the lenders using the system price for several million niches at least. Someday when I have nothing better to do I may count them.

Shoppers need to understand that no lender operates in every niche, and the narrower the niche, the fewer the lenders. In a survey of 15 national lenders that I did in response to the letter cited above, I found that all 15 made investor loans on 30-year fixed-rate mortgages. However, only 9 of them made investor loans to borrowers who were doing a cash-out refinance, and only 4 were also willing to waive standard loan documentation requirements. On adjustable rate mortgages, furthermore, the number fell to 2.

Another thing shoppers need to understand is that the lender offering the best deal in one niche is very unlikely to be the one offering the best deal in another niche. In a study of 13 lenders operating in 19 niches that I did some time ago, I found that 12 of them offered the best deal in at least one niche. Further, no one of the lenders offered the best deal in more than 3 of the 19 niches.

Nichification is a major reason why mortgage brokers have become such a major part of the market in recent years. Since mortgage brokers deal with multiple lenders, usually 30 or more, they are well positioned (as consumers are not) to identify the lenders who operate in a particular niche, and select the best of the available deals.

To shop effectively, consumers need to locate themselves in the correct market niche beforehand. (This is what the letter-writer did not do.) Otherwise, the shopper does not know whether the information collected reflects niche pricing or not. It also helps to have some idea of how your particular niche is priced. Below is a list of the major niche factors, and some selected illustrations of niche pricing.

 Niche Factors

All the factors listed below are used by at least some lenders in pricing mortgages.:

Transaction Characteristics:

1. Loan Amount

2. Desired Lock Period in Days

3. Down Payment (As Percent of Property Value)

4. Term

Property if Not Single-Family Detached:

5. Two-Family

6. Three-Family

7. Four-Family

8. Co-op (Building Is Owned by a Cooperative Association in Which Members Own Shares)

9. Condominium (Borrowers Owns Unit in a Project in Which Some Facilities Are Owned in Common)

10. Condominium More Than Four Stories High

11. Manufactured (House Was Not Built on Site)

12. Attached ("Twin", "Triplex", "Row")

13. Planned Unit Development (House Is Located In a PUD With a Homeowners Association That Charges Dues)

Loan Purpose if Not to Purchase for Occupancy as Permanent Home:

14. Purchase Second Home (Vacation Home)

15. Refinance

16. Cash-Out Refinance (Loan is Larger Than Old Loan Balance By an Amount Larger Than the Settlement Costs)

17. Investment (Home is Being Purchased to Rent Out)

Documentation If Not Standard:

18. Alternative Documentation (Borrower Wants to Provide Payroll and Bank Statements Rather than Wait For Verification of Information from Employer and Bank)

19. Documentation for Self-Employed (Borrower Wants to Use Special Documentation Requirements Available for the Self-Employed)

20. No Income Verification (Borrower Doesn't Want Reported Income to Be Verified by the Lender)

21. No Asset Verification (Borrower Doesn't Want Reported Assets to Be Verified by the Lender)

22. "No Docs" (Borrower Doesn't Want Reported Income or Assets to Be Verified by the Lender)

23. No Income Ratios (Borrower Doesn't Want Income to Be Used in Determining Qualifications)

24. Streamlined Refinance (Borrower Wants the Reduced Documentation Requirements Available on Refinances Only)

Special Borrower Characteristics

25. Non-Occupant Co-Borrower (One of the Borrowers Won't Be Living in the House)

26. Subordinate Financing (There Will Be a Second Mortgage On the Property When the New Loan is Made)

27. Non-Permanent Resident Alien (Borrower is Employed in the US But Is Not a US Citizen or Permanent Resident )

28. Non-Permenent Non-Resident Alien (Borrower is Not a US Citizen and is Not Employed in the US)

29. Waiver of Escrows (Borrower Wants to Be Responsible For Payment of Taxes and Insurance)

Some Examples of Niche Pricing on a 30-Year Fixed-Rate Mortgage

Any of the factors listed above, alone or in combination with others, may affect the interest rate, points, maximum ratio of loan amount to property value, and sometimes other qualification requirements. Below are a few common examples, but the actual numbers shown may vary from lender to lender. All the adjustments shown are relative to the following "reference" loan:

  • Loan Amount: $200,000
  • Rate Lock Period: 30 days
  • Purpose of Loan: Purchase for occupancy as permanent home
  • Type of Property: Single-family detached
  • Maximum Ratio of Loan to Property Value (LTV): 95%.



Adjustments to:

Niche Feature

Interest Rate


Maximum LTV

Loan Amount      















Lock Period      

60 days


+.125 Points


90 days


+.375 Points


120 days


+.750 Points

Purpose of Loan      




2nd Home Purch



Refi Cash-Out







Refi Cash-Out/Investment





Type of Property





3/4 family




No Income Verification




Escrows Waived




January 9, 2002 Postscript

I took a look at this piece today and was astounded to see that I did not mention one of the most important niche factors: the borrower's credit score.  Lenders always check the borrower's credit, and usually rely heavily on a single measure of creditworthiness called the "FICO score". 

FICO scores range up to 850, which is a perfect score.  One lender, for example, provides the lowest prices only to borrowers with scores above 680.  Those between 620 and 680 pay a rate .375% higher on a 30-year fixed-rate loan.  Between 600 and 620 they pay .875% more.  And between 580 and 600 they pay 1.25% more.  There is no uniformity in how these scores are used, however, and other lenders may use different cutoff points.

Copyright Jack Guttentag 2004



Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

Search More Info On:

  • mortgage lenders
  • mortgage lender
  • borrower
  • mortgage broker
  • escrow software
  • mortgage insurance
  • Shop For Your Mortgage Now!
    Shop For Your Mortgage Now!

    You'll be re-directed to Top-Lenders.com


    Related Articles From Mortgage Professor's web site:

    Mortgage Auction (or Lead Generation) Sites
    May 20, 2002 I Do Auction Sites Work For Borrowers? "You have discussed internet referral sites and individual lender sites, but I don?t see any reference to Lending Tree, which does a lot of advertising. Where does it fit?" Lending Tree is what I call ... more...

    HUD's Proposals For Reform
    October 19, 2002 On July 29, 2002, HUD released a set of proposals to substantially change the ways in which home loans are originated in the US.  As usual, the proposals were open for comment, and many thousands of them were received.  Mine was among them, and is shown ... more...

    Fixing the Mortgage System So It Works For Borrowers
    September 5, 2005 In some respects, the United States housing finance system is the best in the world. In other respects, it is unworthy of a banana republic. Our housing finance system has a primary market and a secondary market. The primary market is the market the borrower ... more...

    HUD and Yield Spread Premiums
    October 3, 2001 The recent decision of the US 11th Circuit Court of Appeals in the case of Culpepper vs Irwin has suddenly swung the spotlight on HUD policy regarding yield spread premiums (YSPs) retained by mortgage brokers.  To this date, HUD has been impotent in dealing ... more...

    More on lenders...