Banker explains why a buyer’s loan rate is different than advertised rates

Mortgage banker: Terry Hastings Home value: $500,000

Loan amount: $425,000

Loan terms: 4.99 percent, 30-year fixed

Backstory: Hastings received a call from a couple who were referred by their Realtor. They were trying to find a buyer for their home, but in the meantime, a perfect home came on the market that they wanted to buy. What could they do?

Hastings pre-approved them after reviewing their credit report, bank statement and recent paystubs. They could buy the new home and worst case scenario, carry their existing home until it sold.

In order to satisfy the underwriter’s suspicion that it might be an investment property, Hastings would include a copy of the departure residence’s Multiple Listing Service listing to prove they were trying to sell it.

The borrower received the electronic disclosures and e-signed, but then followed up with a phone call. He saw on the internet that the average 30-year loan rate was ¼ percent lower than his quoted rate. Could his bank match it?

Hastings explained how mortgage rates are determined. Most conventional mortgage loans are sold to Fannie Mae or Freddie Mac. The banks lend out the money knowing that these Government Sponsored Enterprises (GSE’s) will purchase the loan from them in the future so they can replenish their funds.

Fannie Mae and banks determine the difference from the base interest rate based upon risk. Credit score, down payment, type of home, occupancy and other situations all factor into the rate. The higher the risk of the loan as determined by Fannie’s chart, the higher the cost of the loan.

Hastings sent him the chart of the risk costs called the loan level price adjustments (LLPA) found on Fannie Mae’s site. The borrower’s credit score was slightly challenged, the down payment was small and according to the chart, it would cost one point to get the base rate.

Instead of paying one point or $4,250, the interest rate could be raised by ¼ percent to absorb that cost. That was the difference in the rate he saw on the internet.

After seeing the chart and transparency, the buyer locked the loan rate and closed 45 days later. He now understood why the rate you see advertised isn’t always the rate you get — many factors determine the final interest rate!