What mortgage brokers don’t tell you: Hidden penalties abound

January 17, 2011

A sign reading "Honey... Stop the car!" is seen as it announces a house for sale in Silver Spring, Maryland, May 23, 2010. Photo taken May 23, 2010.   REUTERS/Jonathan Ernst There’s a host of information a mortgage broker or banker won’t tell you up front that may increase the cost of your financing.

You could pay much more on a mortgage than your initial quote rate based on a rating system used by government mortgage insurers Fannie Mae and Freddie Mac. Brokers and bankers rarely tell you this coming in the door. They want to lock you in to a loan as soon as possible. With rates rising, this is really important to know.

In the wake of the biggest real estate meltdown in American history, the devil’s in the details when you apply for a loan. This hidden rating system will penalize you with a higher rate if your credit score is low or you apply for certain types of loans. It’s being employed by Fannie Mae and Freddie Mac, the government’s captive mortgage entities, which account for about 80 percent of new loans now.

As of January 1, mortgage brokers and bankers have to tell you that you may not get the best rate if your credit report is flawed, although they may not give you essential details up front on what else could bump up your finance rate.

You need to ask about how you will fare in the Fannie/Freddie “risk-based pricing” regime, which is basically a computer-run scoring matrix run by your banker. Here are some factors that could raise your cost of credit:

  • Credit scores (based on the FICO system) below 740.
  • High loan-to-value ratios (the percentage of the property’s value that’s mortgaged). The more equity you have or the more money you put down, the lower your rate.
  • Adjustable-rate, Interest-only or 40-year loans.
  • Cash-out refinancings.
  • Investment properties.
  • Condominiums and cooperatives.
  • Manufactured homes.
  • Multiple-unit properties.

The risk-based pricing program evaluates the type of loan, your credit score and loan-to-value ratio and determine what “add-ons” will boost your quoted rate, if any.

A low FICO score — say below 620 — may add at least a half-percentage point to your loan. An interest-only loan may increase your rate by three quarters of a point. Those financing buying investment properties will likely pay the highest rates — up to one and three-quarter points more.

As with all loans, it pays to pull your credit report before you apply for a loan or refinance. Certain items such as record errors or bumping up against credit limits can be fixed fairly easily and raise your credit score. Outstanding bills such as medical debts may also hurt.

“We encourage people to be more informed,” says Dick Lepre, a senior loan officer with RPM Mortgage in San Francisco. “If they want the best rates they need to keep their credit score at or above 740.  They must be vigilant about things such as medical collections which are often the result of confusion regarding medical co-payments.”

You can request a free credit report from www.annualcreditreport.com. Just be careful not sign up for credit monitoring services that will cost you additional monthly fees. The Federal Trade Commission spells out some of the pitfalls of so-called free services.

One other side effect of risk-based pricing: The stricter underwriting rules also make it more difficult to qualify for a loan, which is not much help to markets that are swimming in properties and won’t get back on their feet unless demand returns.

Hindsight seems to rule the day as the government struggles to alleviate the home crisis. If only the mortgage barons had some realistic underwriting standards five years ago. It would have prevented a lot of heartbreak.

7 comments

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[…] What mortgage brokers don’t tell you: Hidden penalties abound – interesting points about your cost of credit […]

Posted by The Dow Jones Industrial Average Rallies As Earnings Take Center Stage | Daily Trading Ideas | Report as abusive

Banks don’t like risk, so the riskier the loan (IE the further away from a traditional, fixed interest rate, loan size of 80% of home value or less, etc) will result in a higher rate. As will things like cash out, lower credit scores, mortgaging a home you don’t actually live in, non-traditional (IE non stickbuilt) home types, etc.

I’m sure it’s not obvious to everyone, but it is sometimes surprising, as a former mortgage industry employee, how little people actually know about the mechanics of the largest investment the majority of Americans will ever have. I think the problem is that just before the peak of the housing boom it was almost accepted that everyone in America had “the right” to own a home, when in reality there are plenty of people that don’t, and shouldn’t.

Posted by Adam_S | Report as abusive

This is like telling the 6th grade basketball camp that those who don’t have a 42-inch vertical leap will run laps after practice. Not to mention the suggestion that sound lending principles did not exist five years ago. Blather. Call it what it was: recklessness, negligence, outright fraud, and thievery. More proof that now, more than ever, we should forego traditional banks.

Posted by Soothsayer | Report as abusive

when you cant afford a place to call your own,we as a people will lose more liberties

Posted by deerecub1977 | Report as abusive

[…] Click here for full article. […]

Posted by What mortgage brokers don’t tell you: Hidden penalties abound- Tony Alvarez | Report as abusive

@deerecub1977, would you like to explain that logic further?

Posted by iflydaplanes | Report as abusive

Affordable housing existed for the pioneers. Land was granted to the pioneers in areas where the Government decided it wanted people to settle in. After acquiring a land grant by traveling to the area and staking a claim, it only required the home-owner-to-be to acquire an ax and expend a lot of labor to house himself and his family. If an equitable way could be found, the same could be offered today by taking small portions of the National Forests and granting ownership to plots that must be built on within a period of time and lived on for a certain period of time.

The “right” to Government funding houses to all who do not, or can not acquire a down payment sufficient to convince private investors to take the risk to loan them the rest of the money, is a fictitious right. It is a scam produced by political parties intent on selling votes paid for with other peoples money.

The political party that began the scam, started slowly but eventually perverted the entire mortgage market and caused the crash that broke the banks. Following that injustice, both parties tried to hide the problem by creating money that no one had earned, and using it to prop up the banks that had tried to profit from the artificial gravy train. The bankers knew what they were doing and should have taken the losses. Instead both political parties solved the problem by transferring the cost to the backs of the taxpayers.

And those who bought into debt they could not afford, should be surveyed to see which school system gave them their high school education. Apparently the lack of a normal high school education kept them from understanding the biggest financial transaction they will ever make in their lifetime. Perhaps the acquisition of that knowledge should be added to the criteria to graduate.

Posted by RightGunner | Report as abusive

Wait a second; Isn’t FICO a private scoring system, run by seedy-but-very-wealthy parasitic companies with little or no oversight or consumer protections? Doesn’t *everyone* have some kind of stupid error on their credit report? Why would we trust these people at all?
Why the heck is my government relying on a set of flawed, made-up, semi-secret rules created by a private for-profit business consortium in order to determine anything at all about anything?

I’d be fine with a fully open system, subject to public oversight (like telephone rate tables), but currently these private companies have a business model that depends on them hiding information until you pay for it, and they are the only ones who get to arbitrarily set the heuristics and scores… and that’s just a recipe for all kinds of evil.

Posted by Tamooj | Report as abusive

I like the part where I make a deposit, the bank can loan multiples of that deposit and call those loans “assets” and I can withdraw my money immediately. Banking doesn’t seem very risky to me.
Condorcet

Posted by Condorcet | Report as abusive

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