Knowing where you stand before applying for a mortgage is key to negotiating a better interest rate. Yes, you can negotiate your rate!
But if you don’t know what type of risk you present to a bank or lender, how can you be sure you’re getting a good deal?
While it may seem obvious to those in the industry, many prospective and existing homeowners don’t seem to know when they have the easiest approval on their hands, or the trickiest deal in the history of man.
Let’s take a look at some common loan scenarios to help you better understand your position.
- This is your full doc
- 800 FICO score
- W2 borrower
- With a conforming loan amount
- And no obvious red flags
This is the most common mortgage “flavor” you’ll hear about. When someone says the loan is “vanilla,” they’re basically saying it’s a flawless loan scenario.
In other words, the borrower has great credit, good income and assets, and plenty of home equity (or a sizable down payment).
The property is also an owner-occupied, single-family residence, meaning there should be no pricing adjustments whatsoever.
As a result, this type of mortgage presents very little risk to the originating lender, and pricing should be very favorable.
Expect mortgage rates at or below those advertised and fight for the lowest rate out there. Shop your rate with confidence, knowing everyone and their mother should be fighting tooth and nail over your loan.
For the record, the mortgage rates you see advertised assume your loan is premium, imported french vanilla…
- This borrower might have excellent credit
- But display one or two nagging issues
- Such as limited assets or occupancy concerns
- Or perhaps they’re just self-employed
Most people like mint chip, and it’s a pretty common flavor, but it also means something isn’t exactly right, even if seemingly minor.
It could be that the borrower has good credit, but not a lot of money to put down, or very little equity.
Or it could be that the borrower has marginal credit, despite having a great job and tons of assets in the bank.
[What credit score do I need to get a mortgage?]
Perhaps they’ve changed jobs recently or have some other funky income structure (paid seasonally, on commission, self-employed), or their assets aren’t too impressive.
Maybe there are occupancy issues – think the homeowner buying a house down the street, but claiming they’re going to rent out the old property, even though the new house is smaller.
Whatever it is, the issue presents some difficulty, and as a result, some lenders may not want to touch it.
Put simply, the fewer banks willing to do the deal, the less you can shop around. And you may be stuck submitting the loan with a lender that offers less favorable interest rates.
You can still go nuts looking around for the best deal, but you may not have access to every bank out there. There may also be more snags along the way…so working with a reputable lender is more important.
- This is the flavor of subprime
- And perhaps layered risk
- But I’m not referring to nuts and marshmallows
- We’re talking low credit score, low down payment, and other questionable stuff
Mint chip ain’t so bad when there’s Rocky Road around. While some people like the heavenly mix of chocolate ice cream, nuts, and marshmallows, not everyone will be so enthused.
In other words, you may have a hard time getting your deal to close with ANY bank or lender, even so-called subprime lenders (if they still exist).
This is your “bad news” loan scenario, one where multiple things are going wrong all at once.
Think poor credit score, minimal assets, low down payment/equity, funky job situation, and maybe even more serious issues like previous late mortgage payments or a short sale/foreclosure.
Long story short here is that approval is more of a concern than the mortgage rate you ultimately receive.
Your first priority is finding a lender that is willing to work with you. You should certainly shop around, but expect rates much higher than those advertised for the significant risk you present.
- This is a special edition flavor
- Dedicated to those who took out mortgages right before the bubble burst
- Many are now in underwater positions (owe more than the mortgage is worth)
- Thanks to those zero down home loans they used to buy homes at the height of the market
Here’s a bonus flavor in light of the ongoing mortgage crisis. Post-housing bubble, there are a ton of good homeowners out there with negative equity.
In other words, their loan-to-value ratios exceed 100%, making their loans very high-risk, even if they’ve got a great job, stellar credit, and plenty of money in the piggy bank.
Fortunately, there are numerous options for severely underwater homeowners, including the popular HARP Phase II.
So all hope is not lost, even if it’ll take you a decade or two to get back in the black…
You can even snag a super low mortgage rate when refinancing, so again, be sure to shop around with a variety of banks, credit unions, and mortgage brokers.
The moral of the story, regardless of your flavor, is to know it before you apply for a home loan.
This can help you prepare for the road ahead, and better align your expectations with reality.
Read more: What mortgage is right for me?