What is Needed to Get an Interest Rate…

 

I get calls from friends, family and referrals with all types of questions and “what if” scenarios when they are in the process of buying a property. I can hear the frustration in their voices when they ask me what are interest rates and I respond with questions instead of an exact number. Understanding just how interest rates are determined is very important and there are many factors that affect the interest rate. The main concept to realize is that buying an interest rate (getting a loan) is not like a buying a pack of gum. A pack of gum’s price is not dependant upon who chews it. Interest rates vary from individual to individual based upon a number of characteristics of the borrower. Credit score, amount borrowed, property type, amount of down payment, previous payment history, existing debt, loan program and loan term all influence what your rate will be when you borrow money. As a result, each time someone asks me what interest rates are, I can’t give a realistic rate until I have answers to the above characteristics.



For instance, some people have great credit while others may have had one or two recent late payments. Past experience has shown that the person who has had a late payment or two presents a higher risk and will thus get a higher interest rate (think risk-return from that finance class in school).



To make quoting a realistic interest rate even more challenging, the financial market changes every day and sometimes more frequently. Thus, a rate quote today with all of the above information will most likely change tomorrow.



Although to quote an exact rate requires specific information about the borrower and property, there are some factors that have a bigger influence than others. The largest factors are credit score, occupancy and property type. I’ll briefly explain each.



The biggest factor effecting your mortgage terms is your credit score. A credit score is a number (from 350-850) that is calculated based on your credit history. This gives lenders a quick, objective way to make loan decisions. The three national credit bureaus each have their own software and methods of determining credit scores. Lenders will typically use the middle score from these bureaus when underwriting a loan.



Occupancy of the property is another major factor. Owner occupied or second homes are grouped in one category while non-owner occupied or investment properties are another. Historically, owner occupied properties have lower loan default rates than non-owner occupied. As a result, interest rates on owner occupied properties are lower than non-owner occupied.



The third major factor is type of property. Whether the property is a single family residence, duplex, condo or other type of property impacts many facets of the mortgage including interest rate. For example, a condo typically has a higher interest rate and can vary based upon the down payment. To further complicate properties, there are different types of condos and non single family properties based upon the structure of the home owner’s association.



Considering all of the factors that determine a borrower’s interest rate and ultimately loan program is why a mortgage professional is critical to the loan process. There are hundreds of programs available to consumers and selecting the one that best fits your needs can be the difference between smooth real estate transaction and a rough one. In addition, a properly structured loan program may save thousands of dollars over the life of the loan.



-----------------------------------------------------------

Gary L. Solka, Mortgage Banker

Sente Mortgage

gary.solka@sentemortgage.com

512-637-9900

www.SolkaTeam.com