How To Get Home

In the late 80’s and early 90’s, lenders were working on programs to charge more for higher risk loans and less for lower risk loans. As a result of the evolution of credit scores and automated underwriting, more lenders began to adopt the concept of risk-based pricing and use it to increase loan production. In 1995, bank regulators began to closely monitor lenders performance levels on lending in lower-income neighborhoods. To lend to these higher risk households, banks saw it as both an opportunity and requirement to develop lending models to determine how various levels of risk should impact the interest rate charged and thus offset the probability of default.

The growth of the secondary markets for mortgage loans has also played a role in the widespread adoption of risk-based pricing. There are many factors that will influence how a pricing decision is reached: credit score, loan-to-value (LTV), property use, loan size, and documentation level all impact the interest rate.

There is going to be a material difference in price between a full doc, owner-occupied, 80% LTV on a single family residence and a stated income, investment condo property with a 90% LTV. So what can you do to lower your risk and thus lower your rate?

1. Make sure your credit score is as high as possible.

2. Look at putting more down as higher loan-to-values increase risk.

3. Try to up-doc as much as possible by reducing your debt levels so that a full doc loan works for you.

4. Consider different property types. 4 unit rental properties have more risk than single family.

As a lender, I am in the business of making mortgage loans. Sometimes, borrowers can significantly reduce their risk by making some of the above changes. As a result, they can get a much lower rate/monthly payment for their new home loan. For some, it does not make sense (much cheaper to rent) to buy because the risk associated with their current financial situation will produce a mortgage payment that is disproportional to their income.

No one wins by making a difficult situation worse by getting into a high risk/rate loan. The ability to improve one’s situation and make the necessary structural changes to one’s credit is going to be limited in a high housing expense enviroment. Sometimes, it is the right choice to delay buying a home until the needed changes are made. Take the time to talk with a Mortgage Planner and find out where you are now and what changes you can make to reduce your risk and thus your monthly payment.

Knowing is half the battle and having a good plan will go a long way toward helping you reach your home ownership goals.