Pitfalls Encountered During The RateShopping Process

Rateshopping unfortunately is not as simple as just calling up 3 or 4 lenders and seeing who has this week's lowest rate. Rates themselves fluctuate on a daily basis and there is usually no one rate for all borrowers. The amount of documentation you provide, the size of your down payment, your credit (FICO) score, whether you are an owner occupant or investor, buying a single or multi-family home, condo or co-op, loan amount (conforming or jumbo), and another of number of factors affect the rate you receive. Shopping is made more complicated by the fact lenders are trying to dupe you with a variety of sales tricks and tactics (see here for more) including teaser rates, obscure APRs, incomplete GFEs (Good Faith Estimates), lowball phony rate quotes they cannot really deliver, etc.

Here are some truths and basics to rateshopping as well as how lenders manipulate them and twist truths to their advantage:

1. Rates change or fluctuate on a daily basis. That is the truth. However many lenders overly abuse that truth in order to quote lowball rates to get your application, knowing that once you are further in the process rates will mostly likely change and then they can bump you up even further. Your available rate may genuinely change, but what the lender is taking advantage of is not just the rate change but also the spread between wholesale and retail rates. The wholesale rate is called "PAR" and many lenders make extra rebates or back end points called yield spread premiums. Lenders will use normal everyday rate fluctuations in order to sneak in larger, often times ridiculously inflated YSPs. The concept behind YSPs takes some time to understand so we have given much more in depth examples and how they affect the way you rateshop at the following link:

(More On Wholesale/Retail Rate Markups)

2. Rates are based on risk. That is another truth. Lenders view certain loan characteristics as much riskier than others. Here are some examples:

Doc type - The less documentation you show a lender, the more risky a loan is considered, the higher the rate will be. There are a wide variety of loan programs out there, Lite Docs, Stated Incomes, No Docs, etc. The lowest rates are available to customers who document and prove, income, assets, and employment. Usually called Full Doc loans. The 2007/2008 mortgage crisis has greatly limited the availibility of less than Full Doc loans.

Down payment - Lower down payments, mean more risk, which translates into higher rates. A person who puts 5% down is viewed as more likely in the event of a problem with payments to walk away from a property than someone who put 20% down.

Fico Score - Customers with problem FICO scores of 620 less are going be considered much more risky than a borrower with a 660, 700 or higher score. Credit in addition to doc type is one of the greatest factors involved in determining rates. The 2007/2008 credit crisis has made many loan programs even more FICO sensitive.

Owner Occupied Versus Investor - Banks see individual homeonwers as more likely to take better care of their home than investors. Hence investors will be charged slighly higher rates even when all other factors, such as credit, down payment, etc. are equal.

Single Family versus Multi Family - Single family homes typically have lower rates than 2-4 families. For some reason banks are weary of tenants and are not 100% percent confident in every homeowner's ability to manage a multi family home. A multifamily's income however can improve your DTI ratio and possibly help offset a mulitfamily rate increase.

Condos/Co-ops - Both are generally considered riskier than individual real estate and will have a slight rate bump on most loan programs.

3. You do not get your rate until you lock. One more truth. Different banks have different procedures for ratelocks and will most likely require a reasonable certainty of being approved under a particular loan program in order to lock the rate. If there is uncertainty of a borrower being fully approved they may even require waiting until underwriting has provided a full loan commitment. There are also slight rate increases for ratelocks of varying degrees. A 30 day ratelock may have an interest rate of an 1/8 or 1/4% less than a 60 day ratelock. Many banks will advertise rates for the lowest, fastest ratelock terms over the phone and then inform you of the need for a longer ratelock when they get your application. How fast a bank can close your loan depends on the type of loan program, access to documentation, whether other issues such as title problems pop up, how well staffed and trained bank employees are, whether it is a direct lender or broker etc. (In order to find out more about how lenders handle paperwork flow, click here)

One more very, very, very, important aspect of ratelocks.

Ratelock time is also when many lenders use the opportunity to bump up the wholesale/retail spread on the original lowball rates they quote of the phone. As mentioned above in #1, rates do fluctuate daily and many lenders will take advantage of this movement to greatly markup up their wholesale/retail spread and try to pass it off as a regular rate change. Click on the link above in #1 to read more about wholesale/retail markups and for some examples of wholesale ratesheets.

Most banks sell their loans into the secondary mortgage where they are grouped into pools and used as security for mortgage backed bonds. Investors who buy those bonds expect higher returns for riskier loan categories and hence banks have to pass that cost along as higher rates There are exceptions in such cases such as FHA or some FNMA loan programs where those agencies guarantee loans in case of default allowing banks to charge lower rates because investors already have an additional entity guaranteeing the underlying collateral. FHA and most FNMA programs are Full Docs within certain lending limits. Loans that fall outside those limits (FNMA) are considered non-conforming and usually sold to investment banks that securitize them as mortgage backed bonds. Bonds backed by non conforming mortgages, whether they are non conforming because they are jumbos or have less than full documentation, are subject to swings caused by market forces and investor demands for higher returns in exchange for higher risks.

LoanShoppingPros can assist you in the rateshopping process because we are industry insiders with access to wholesale ratesheets and extensive knowledge of the way banks and brokers manipulate rates. We shop lenders ahead of time in order to determine who the price leaders are. Lenders who abuse our referrals with inflated YSPs and wholesale to retail markups are dropped from our network.