In Seattle your mortgage rate when applying for a new home loan, will depend on a number of factors. What is this “Risk Based Pricing” and how does it affect all home mortgage rates? A bank perceives risk as far as repayment of a mortgage as being directly related to a number of factors. They are (not inclusive): Credit score, ability to repay, desire to repay, job status, type of property, property location, whether property will be owner occupied or non owner occupied, purpose of the loan, documentation level and buyer’s assets. Each lender will assess these factors differently and possibly add or subtract other factors.
The single most important factor is your credit score. Your score is an indication of how you have handled credit in the past and how you will handle it in the future.
So how exactly does a lender price out a mortgage in Seattle or for that matter anywhere else? There are 2 ways to price a home loan. The first is obvious and it’s the interest rate. The second is the cost of that rate. According to Risk Based Pricing if your credit score is low than you should expect to pay a higher interest rate and higher loan costs. How do they determine what the risk is? Simple, based on your credit score you will be charged a fee that is added to the cost of the loan. Some lenders will charge a fee even to borrows with 720+ scores. If your score is 640 you might have to pay 1-2 points just to get the loan. So if your mortgage is $350,000 than the cost just to get the mortgage is $3500-$7000. Then you still have closing costs on top of that. If your score is 720+ you might have a cost of ¼ point. How will you know? Simple you will never know because even your mortgage broker will not know. The cost will be hidden in the rate sheet and only the lender will know for sure.
These costs are added not by bankers but by bureaucrats. This appears to be another idea formulated by people who are not in the industry and will have negative consequences. Given how fragile the recovery of our economy is anything that makes it harder to get a mortgage is not a good idea. If lenders were responsible for loans that would be best for America. What is really scary is having a politician like Barney Frank in charge of the housing industry. That was the case until this last January. When politicians are in charge of industries that they have absolutely no idea they work we get the worst of all worlds.
So for the foreseeable future mortgage rates in Seattle will be risk based priced.
