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-year 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 mortgage broker/loan officer used to make in commission on the back-end of the loan.

Because that practice was outlawed, it’s now the cost or credit the borrower receives for agreeing to a certain interest rate.

How to Read a Mortgage Rate Sheet

Look at the following sample tables from a mortgage rate sheet:

ratesheet

  • You’ll see a series of interest rates with corresponding prices
  • Those closest to 100 are known as par rates
  • If the number is over 100, the excess is provided as a credit to the borrower
  • If the number is under 100, points or a fraction thereof need to be paid for the given rate

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%, as pictured above. It’s the number closest to 100 without being below 100.

It means if you have no pricing hits or pricing incentives based on your unique loan parameters, the bank or mortgage broker would provide you with 0.385% of the loan amount in the way of a lender credit.  That in turn could be used to offset some of your closing costs.

Assuming you wanted the 4.5% rate instead, it would cost you 0.147% in the way of mortgage points, which are paid at closing or rolled into the loan amount.

To give you an idea of cost, on a $200,000 loan amount that 0.147% would set you back $294.  If you elected to take the rebate at 4.625%, it would result in a $770 credit.

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 borrower.  Alternatively, the borrower could pay 0.019% (just $38!) for the 4% rate.

Pricing Adjustments Grouped by LTV

However, it’s not that simple. On the mortgage 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:

  • ≤60%
  • 60.01-70%
  • 70.01-75%
  • 75.01-80%
  • 80.01%-85%
  • 85.01-90%
  • 90.01-95%
  • 95.01-97%

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 you, the borrower.

Pricing adjustments and underwriting 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 an interest-only option.

8 Key Factors to Determine a Borrower’s Overall Credit Risk

  • Loan amount (conforming, high-balance, or jumbo)
  • Documentation (full, limited, or stated)
  • FICO score
  • Occupancy
  • Loan Purpose (purchase or refinance)
  • Debt-to-Income Ratio
  • Property Type
  • Loan-to-value (LTV) / Combined loan-to-value (CLTV)

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 at/under $453,100 (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.

Credit Score Adjustments

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:

  • ≥740
  • 720-739
  • 700-719
  • 680-699
  • 660-679
  • 640-659
  • 620-639
  • <620

Borrowers with scores equal to or above 740 may receive a rebate, depending on lender incentives, whereas those with median scores of 680-719 may see no adjustment, and those with scores below 660 could receive a pricing hit.

Because a 740+ 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 score alone.  In order to qualify for a loan program or secure a lower interest rate, some brokers may opt to offer a rapid rescore to certain borrowers to increase their credit scores quickly.

Occupancy and Property Type

Property type is another typical and important adjustment. While you’re 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.

Today's Rates

Most banks and lenders allow residential properties to have up to four units, but you will get hit for it.  Or your LTV will be restricted to a lower percentage, such as 75%.

Pricing hits are also common for condos, with high-rise condos (4+ stories) taking larger hits.

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:

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 2 points or more, so borrowers will do all they can to avoid such hits.

If you consider a non-owner occupied 4-unit property, you can see how the cumulative pricing hits can really start to add up.

Mortgage Transaction Type

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

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.

You may also get hit for a cash-out refinance combined with a low credit score, so you can get hit two times, once for credit score, and once for cash out.  And it can really add up.

Documentation Type

Another key adjustment that can greatly alter your interest rate is documentation type, and even the mortgage program you’re 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 home buyers for obvious reasons.

What Else Might You Get Hit For?

  • Adjustments for interest-only option
  • Or to remove impounds
  • And to extend a lock if necessary

On top of all these possible costs are smaller hits for add-on items such as interest-only and mortgage impounds.

Borrowers must pay a small premium to enjoy the benefits of an interest-only option or to avoid an impounded account.

Usually the small adjustment is worth the flexibility of taking such an option if you’re interested in it.

There are also small pricing adjustments for things like lock extensions, if you’re unable to close your mortgage on time and the lender won’t absorb the cost.

Any or all of these adjustments will affect your mortgage rate, and move it accordingly or change the costs of obtaining the loan.

Say your total adjustments add up to 1.125. This would effectively move your rate in the above example rate sheet to 4.75% for the 30-year fixed with a 30-day lock.

Keep in mind that you could also buy the rate down if you wanted a lower rate, as mentioned, but you’d have to pay points upfront out-of-pocket to get the loan at the lower price.

For example, if you wanted an interest rate of 4.625%, you’d have to pay 0.74% (points) to get that rate, which using our $200,000 loan amount, would be $1,480.

In summary, the more risk you present to the lender, the more adjustments you’ll have.  And the more adjustments, the more expensive your loan and/or higher your interest rate will be.



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