Mortgage Pricing Adjustments

If you ever get your hands on a lender rate sheet, you’ll probably get confused in a hurry. Although each bank or mortgage lender will have their own format, if you know the basics, you’ll be able to read almost any rate sheet and give yourself an edge during the pricing game.

Usually on the left-hand side or on the top of each rate sheet you’ll see loan programs and rate boxes corresponding to each program. Each program should be headed with a loan program name and description such as 30 yr fixed, program #sample123.

Below that will be a list of mortgage rates and corresponding rebates and costs. In the examples below, you’ll see the rates and corresponding yield spread premium (YSP), which is what the broker/loan officer makes on the back-end of the loan.  Keep in mind that they can also charge mortgage points in the front as well, which are paid at closing or rolled into the loan amount.

Look at the following sample tables:

ratesheet

The par rate, or as close as we can get to par, on the 30-year fixed for a 30-day lock is 4.625%. Meaning if you have no pricing hits or pricing incentives based on your unique loan parameters, the bank or mortgage broker would make 0.385% in YSP.  For the 15-year fixed with a 30-day lock, the closest rate to par would be 4.125%, with 0.277% back to the broker.

However, it’s not that simple. On the rate sheet, you’ll also notice a section titled, “Pricing Adjustments”. In this section, you’ll likely see LTV (Loan-to-value) percentage tiers, the most common being:

less than or equal to 65%
65.01-70%
70.01-75%
75.01-80%

Under each of these tiers will be a variety of adjustment descriptions. If you look these over, you’ll see where banks and lenders are hitting you or helping you when analyzing your loan scenario. All of these adjustments work as pricing hits or incentives based on your LTV and your unique loan scenario. A pricing hit raises your interest rate, while a pricing incentive lowers your rate. The more incentives the better, as they equate to money-back to the bank, lender, or you, the borrower.

Pricing adjustments and guidelines vary greatly from bank to bank, but there will almost always be pricing adjustments for loan amount, credit score, property type, occupancy, transaction type, impounds, and interest-only.

The eight key factors used to determine a borrower’s overall credit risk are:

· Loan amount
· Documentation (full, limited, or stated)
· FICO score
· Occupancy
· Loan Purpose (purchase or refinance)
· Debt-to-Income Ratio
· Property Type
· Loan-to-value / Combined loan-to-value

One common pricing adjustment is based on loan amount. Most banks and lenders will offer a lower rate for conforming loans, so any loan amount under $417,000 (the jumbo loan limit) will typically come cheaper than those above that threshold. Additionally, any loan amount over $1 million will usually come with a sizable pricing adjustment.

Another typical and very important pricing adjustment is based on your credit score. This single adjustment can take your rate one point higher or lower depending on your score. The tiers for credit scoring are usually broken down as:

>720
680-720
660-680
640-660
620-639

Scores above 720 will likely yield a rebate, with median scores of 680-720 having no adjustment, and scores below 660 receiving a pricing hit. Because a 720 score may carry a rebate of .50% and a score below 660 may come with a hit of .50%, you can see how easy a one-point percentage swing can be based on credit alone.  In order to qualify for a loan program or secure a lower rate, some brokers may opt to rapid rescore borrowers credit scores.

(What credit score is needed for a mortgage?)

Property type is another typical and important adjustment. While your in the process of looking for a property, keep in mind that you may receive a higher rate if you buy a condo or a multi-unit property. Most banks and lenders allow residential properties to have up to 4 units, but you will get hit for it. Pricing hits are also common for condos, with high-rise condos taking larger hit.

Occupancy and property type is one of the biggest adjustments that can affect your mortgage rate, and one that leads to a large amount of occupancy fraud. There are three different property types:

Primary residence
2nd home/Vacation home
Investment property

Because mortgage rates are much lower for an owner-occupied residence as opposed to an investment property or 2nd home, many borrowers will try to convince a bank or lender that the subject property is indeed their primary residence. Pricing hits on investment properties are often 1 point or more, so borrowers will do all they can to avoid such hits.

Transaction type is another adjustment that may affect your pricing. There are three different types of mortgage transactions:

Purchases
Rate and Term Refinances
Cash-out Refinances

A purchase will usually yield a rebate or no cost, while a rate and term refinance will have no cost, and a cash-out refinance will have an adjustment cost.

Documentation type is another adjustment that can greatly determine your interest rate, and even the mortgage program you are eligible for. Banks and lenders originally began offering limited documentation types for borrowers who were self-employed, or who had complicated tax returns and income structures. As time went on, doc types became more and more limited to allow almost anyone to slip through the cracks and qualify for a loan program. Nowadays there are a variety of documentation types including:

Full doc/Limited doc
12 months bank statements
6 months bank statements
SIVA
No ratio
SISA
NINA
No doc

Full doc pricing will usually provide a rebate in pricing or no adjustment at all. Because it’s the most difficult and invasive doc-type, it carries the least adjustments, if any at all. It requires a borrower to show their two most recent tax returns, and verify assets for reserves.

12 months bank statements and 6 months bank statements are the next-step down, and to some lenders will be considered full documentation. The bank or lender will average out your monthly balance to figure out your qualifying income. You will obviously verify assets, but your income is derived from your assets, so tax returns are not necessary to qualify for the loan.

SIVA, or stated-income-verified-assets is just how it reads. The borrower is allowed to state their monthly income, but they must verify assets to cover reserve requirements.

No ratio is a great way for borrowers to avoid disclosing any income, while verifying assets. It is also known as NIVA. This doc-type is helpful if a borrower has multiple rental properties that all generate income, or a job that doesn’t have an easily identifiable income. Because no income is disclosed, the debt-to-income ratio is 0%, or no ratio.

SISA, or stated income, stated assets documentation is perfect for someone who doesn’t want to verify anything beyond their employment. All the borrower has to do is state their income and assets, and verify their employment. If all the figures make sense, that is, if the income doesn’t seem high for the employment, and the assets are in line with the income, the loan should be approved.

The downside to SISA loans is the pricing will usually be a lot higher, and you won’t be able to apply for all the popular loan programs. In addition to that, most banks and lenders make first-time homebuyers verify assets to secure financing. It’s just an increased risk measure for borrowers who have no mortgage history.

NINA, or no income, no asset documentation type allows a borrower to avoid having to disclose income and asset figures. It doesn’t even need to be stated. They will need to verify employment, so it’s important that they have a solid occupation with over 2 year history to avoid getting a decline notice. The loan makes it easy to get qualified, but will carry a hefty pricing adjustment unless the borrower keeps their mortgage at a low LTV.

No doc is the easiest available documentation type to secure a loan. All a borrower needs to provide for a no-doc loan is their credit report. The bank or lender will provide a financing decision based solely on the credit history and the property value. The borrower is not required to state income, assets, or employment. This doc type is a great time saver, and a way to avoid any qualification hassles. The downside is it has a large adjustment cost at higher LTVs, but below 65%LTV you could get away with it for a small fee or no fee at all! Again, this doc-type isn’t generally allowed for first-time homebuyers for obvious reasons.

On top of all these possible costs are smaller hits for items such as interest-only and impounds. Borrowers must pay a small premium to enjoy the benefits of an interest-only option or an impounded account. Usually the small adjustment is worth the flexibility of taking such an option.

Any or all of these adjustments will affect your par rate, and move it accordingly. Say your total adjustments add up to 1.125. This would effectively move your par rate in the above example to 4.75% for the 30-year fixed.

Of course, the broker would likely want to make something on the back-end, so your rate would likely be higher than 4.75% unless you agreed to pay more upfront.  Keep in mind that you can also buy the rate down if you want a lower rate, but you’ll also have to pay upfront for the work involved to get the loan closed.