Getting a mortgage rate and price quote used to be a pretty easy process. If you called around and provided a loan amount, sales price, or estimated value of the house you were buying or refinancing, then any credit score over 660 would get you a solid rate quote. Now, risk-based pricing has made it more difficult than ever to find the best mortgage rates.
It's the questions you don't ask at the beginning of the loan process that could end up costing you thousands at the closing table. The list below is a must-read if you want to make sure there are no pricing surprises during your mortgage application process.
1. What kind of property are you going to buy?
Condominiums, manufactured homes, HUD Homes, and Fannie repos may be priced much lower than that white-picket-fenced house on the corner, but appearances can be deceiving. In most cases, you'll pay a more substantial down payment, a higher interest rate, and greater costs to purchase these higher-risk properties.
Make sure you tell your mortgage professional if you're considering purchasing anything other than a single-family home.
2. What are your credit scores?
Credit scores are the main driver of what your interest rate and closing costs will be. For example, if you have a high loan-to-value ratio and a credit score under 640, you'll have to pay 3% of the loan amount to get the same interest rate as a borrower with a credit score of 740 or higher.
Based on Fannie Mae's guide on loan-level price adjustments, here's a quick rundown of how much your credit score could cost you for every $100,000 you borrow, assuming you have at least a 25% down payment.
- 740 or higher: Nothing extra
- 720 to 740: $250
- 700 to 719: $500
- 680 to 699: $1,250
- 660 to 679: $1,750
- 640 to 659: $2,000
- 620 to 639: $3,000
3. How much are you putting down?
Lenders want you to have more skin in the game than in years past. If you aren't willing to save up the extra pennies to make more than the minimum down payment, you will be considered a higher risk and thus charged a higher rate. Government loan programs like the Federal Housing Administration's and the Veterans Affairs' have some flexibility, but they come with the added cost of mortgage insurance (for FHA loans) and funding fees (for VA loans). We're talking not only thousands of dollars added to your loan, but extra monthly payments as well.
Make sure you get a side-by-side comparison of the all-in payment for each option; don't base your decision strictly on the rate you get quoted.
4. What type of loan do you need or want?
FHA, VA, conventional -- they all come with different rates, mortgage insurance, and fees. For example, you may find that the rate on an FHA loan with only a 3.5% down payment is lower than the rate on a 5%-down conventional loan. The mortgage insurance on that FHA loan is going to have a much higher payment, though. Here is a quick breakdown:
- Lowest down payment: VA, 0%
- Lowest rates: FHA or VA
- Lowest payment: VA or conventional (VA doesn't have mortgage insurance, and conventional mortgage insurance is cheaper than FHA)
- Lowest fees: Conventional (VA has funding fees, and FHA has up-front mortgage-insurance premiums)
5. How much do you want to borrow?
Thanks to the "qualified mortgage" rule, a lower loan amount pretty much always comes with higher interest rates. If you're borrowing less than $125,000, don't be surprised if the rate is higher than what you'd get quoted for a loan amount over $300,000. Why? In its quest to ensure consumers are not overcharged closing costs, the Consumer Finance Protection Bureau put a cap on the percentage of your costs compared to your loan. The problem is that many of the costs of the loan are fixed regardless of the size of the loan. So if you have $1,000 in lender fees, $1,000 in title fees, and $1,000 in origination fees on a $100,000 loan, you'll be OK: The total fees don't exceed 3% of your loan amount.
What if you want to borrow $50,000? Well, you have a problem, because now those same fees represent 6% of the loan amount. Lenders have two options: raise the rate so they can cover some costs or simply refuse to lend less than $100,000 to avoid the consequences of making nonqualified loans. The lenders who still make smaller loans are doing so at higher rates. There is some debate over whether the 3% fee cap can be exceeded on smaller loan amounts, but for now, there will be a smaller pool of mortgage banks willing to lend on smaller loan amounts.
6. How much do you make per year?
You may be eligible for down-payment assistance, closing-cost grants, mortgage tax credits, and a myriad of other special mortgage assistance programs, depending on how much you make per year.
This money is there for the taking, but oftentimes customers simply don't ask about it or their mortgage professionals aren't up to speed on what money is still available. Google "down payment assistance" in your city, and you'll likely come up with a boatload of options based on your income. You may also find that for some programs, the income limits are much higher than you expected. Be sure to call the bank that handles most of your checking and savings: You may find out they have a closing-cost grant or down-payment assistance program available to you just for being a customer.
7. Will you buy this house as an investment property, a second home, or a primary residence?
Appraisal costs run an extra couple of hundred dollars for investment properties; rates are usually about 0.5% higher than the rates for a primary residence.
You'll need at least 10% down to buy that second home -- and 20% to 25% down if you plan to buy investment property.
8. Do you want your payment to include your property taxes and homeowner's insurance?
Setting up an "escrow" or "impound" account involves setting aside some money so that your lender pays your property taxes and homeowner's insurance as part of your monthly payments. If you are opposed to having your money sitting in a non-interest-bearing account to pay your property taxes and homeowner's insurance, be prepared to spend an extra $125 to $250 for every $100,000 you borrow. Keep in mind you have to have an impound account if you are putting less than 20% down, have less than 20% equity in your home, or are getting a government loan through the FHA or VA programs.
9. Are you a veteran/union member or a banking customer with lots of accounts at your bank?
Special programs abound depending on whom you bank with, how much money you have there, and whether you're a member of the armed services, a veteran, or a union member. Be sure to ask the mortgage professional at your local bank whether they offer any specials for banking with them. You may find that you can get cash back for an auto deposit, a grant for closing costs for being in a particular income bracket, or an extra discount for being a current or retired member of a union.
Make sure you ask any mortgage professional you talk to about any special discounts they can access for your mortgage.
10. What's your home worth?
This is especially important for refinances. Make sure you call your favorite realtor to give you a list of similar houses that have closed within a mile or two of your house in the last 90 days. Don't rely on those online automated value systems: They often pull in all kinds of info from the past year, rather than the most current sales. This extra diligence could save you $375 to $550 on an appraisal if the actual prices of homes sold recently are lower than what you think your house is worth. The less equity you have, or the more upside-down you are, the more you will pay in rates and fees. If you aren't sure what the value is, ask for a best-case/worst-case scenario based on the highest and lowest sale you get from your agent.
If you haven't been asked any of these questions, there is a real chance that the rate and fee quote you got is inaccurate. Keep in mind that many of these pricing adjustments are cumulative. If you forget to provide the information related to even a couple of the questions, your cost could go up by more than $3,000 for every $100,000 you borrow, and your monthly payment could end up much higher than you were initially comfortable with.
This extra research makes finding the best mortgage rates more time-consuming, but the thousands of dollars you'll save will be well worth the extra time.
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