Homebuyers that are sitting on the fence trying to decide whethoer or not to take advantage of the record low mortgage rates should know that higher rates may be on the way soon. At the present time, buyers with low credit scores are still be able to get mortgages, but many lenders have imposed credit score increases for those with less than perfect credit. Some additional credit score increases may be on the way soon as well.

The current rate adjustments for some popular loans are described below. The amount of the rate adjustment depends on what type of loan you are looking for.

There are two main types of mortgage loans: Government-insured loans and Conventional Loans. FHA, VA and USDA loans are all government-insured loans. Conventional loans are those purchased from banks by Fannie Mae and Freddie Mac. Conventional loans have very specific interest rate adjustments based on a variety of factors, including credit score, loan to value ratio, COMBINED loan to value ratio (in the case of a first and second mortgage), property type and occupancy of the property. Government loans, on the other hand, do not have nearly as many rate adjustments. In some cases, lenders will charge higher rates for higher risk factors.

CONVENTIONAL LOANS

Currently, Fannie Mae has a matrix of “loan level price adjustments”, which are basically adjustments to the yield of mortgages based on two main factors-credit score and loan-to-value ratio. The qualifying credit score is the borrower’s middle credit score from the three credit bureaus. Loan to value ratio means the amount of the loan compared to either the property value on a refinance transaction, or the sales price on a purchase transaction. For example, a borrower putting down 5% on a purchase has a loan-to-value ratio of 95%. And a borrower refinancing a $95000 mortgage on a home valued at $100,000 also has a loan-to-value ratio of 95%.

Fannie Mae announced on December 29th of 2008 that the loan level price adjustments would be increasing effective on all loans delivered to them after April 1, 2009. This has made conventional loans less competitive compared to their government counterparts like FHA, VA and USDA. Of course, FHA has loan limits of $271,050 in the Dallas / Fort Worth area, so this may not be an option for buyers looking for homes priced above this level.

Here is an example of how the new adjustments will affect the points paid on a $100,000 mortgage (click the image to view larger size):

These dollar amounts represent the amount of discount fees (points) that a borrower will have to pay in order to obtain a “par” rate. An alternative to paying these points is to “premium price” the rate, meaning accept a higher rate and have the lender pay the discount fee. Since the premiums paid by lenders varies greatly, there’s no way to know exactly how much higher that rate will be without consulting a mortgage lender and having them do a complete loan pre-approval, including obtaining a three bureau credit report with credit scores. Here’s an estimate of the average rate increase to expect:

$500 cost – Rate is typically .125% to .25% higher.

$1000 cost – Rate is typically .25% to .5% higher.

$1500 cost – Rate is typically .375% to .625% higher.

$2000 cost – Rate is typically .5% to .75% higher.

$2500 cost – Rate is typically .75% to 1% higher.

$3000 cost – Rate is typically .875% to 1.25% higher.

AND IN ADDITION to these adjustments, there are others for additional risk factors, such as:

• Home equity loans (cash out)
• Property Type (condos and two unit properties)
• Adding an interest-only feature
• Occupancy of the property (primary residence, second home or investment property)

GOVERNMENT LOANS

Up until recently, many types of government loans were available on credit scores of less than 620. These days, lenders not only require a minimum credit score of 620 but also impose higher rates for buyers with credit scores of less than 660 in many cases.

IN addition to these adjustments, some in the industry expect that FHA will come out with some additional rate adjustments to buyers with low credit scores at some point. It was also recently announced that the FHA minimum reserve requirement had dropped below the Federally mandated level of 2%. At some point, Congress will have to figure out how they will replenish this deficit. Loan level price adjustments, as well as possibly higher premiums for mortgage insurance, are certainly a possibility.

Aspiring homeowners should give us a call today to discuss their options. There are many different ways we counsel homebuyers on how to increase their credit score prior to qualifying for a home loan. Today’s mortgage rates are near record lows primarily because the government is purchasing mortgage-backed securities. However, this program is slated to end in March of 2010. With the threat of increased rate adjustments and the ending of this program, home buyers that delay purchasing a home may be missing out on the lowest rates in two generations.