Lenders often advertise excellent rates on 30-year fixed rate mortgage loans, but unwary buyers who think themselves eligible for these rates are frequently in for an unpleasant surprise. This is because the advertised rates typically apply only to buyers with top credit scores and a 20% downpayment—those who have scores lower than 740 or less than 20% down are subject to higher rates, which translate into dramatically higher payments. Buyers with a credit score under 720 often find their loan rates raised 1.5 percentage points or more.

first tuesday take: For years, mortgage loan brokers (MLBs) in the business of offering purchase assist loans have engaged in the bait-and-switch scheme described above. At the moment, Fannie Mae and Freddie Mac are terrified of taking unnecessary risks, and their increased wariness of every imperfect buyer has meant higher rates for those with lower credit scores, pleasantly called risk-based pricing. Meanwhile, those who have diligently maintained a high credit score and have the money for a 20% down payment are rewarded with lower rates and better terms. Buyers who want to know their final rate up-front can take steps to encourage forthrightness from their lenders in the form of a written commitment on the rate and amount, but they should not expect good results. Just ask your lender for a written pre-approval letter with amounts and rates, and see how cheerfully they react.

For information on the recently updated lender disclosures requirements in a risk-based pricing situation, see first tuesday’s recent news blog: “The delinquent release of the risk-based pricing notice”.

Re. “Low rates for just a few” from the New York Times