We recently locked a refinance for a borrower at 6.875% – after he was quoted 5.25% by another loan officer.
The borrower did not use the other loan officer because that loan officer failed to account for many of Fannie Mae’s greatest hits!
Fannie’s “hits” are actually just increases in an interest rate for the various factors that impact mortgage rates – like I discuss all the time: 13 Factors That Impact Your Mortgage Rate.
In today’s blog, I am going to show just how much those various factors actually impact a borrower’s rate – as the amount often SHOCKS borrowers.
These factors are more important than ever too because Fannie has been increasing the size of the hits, and plans to increase them even more in coming months.
Fannie’s “hits” are actually “fees” in terms of points that borrowers pay. And those extra fees just get baked into the rate, meaning the rate is simply raised enough to generate enough extra “yield premium” to cover those fees. As a quick reminder, “yield premium” is the profit we make when we sell our loans on the secondary market after we fund them; the higher the rate we lock, the more yield premium we receive.
Every additional “point” (1% of loan amount) in fees results in about a 1/4% increase in rate. This is similar to how if a buyer pays a point, she can buy DOWN her rate by about 1/4%.
Here are some examples of Fannie’s “Hits:”
The “cash out” hit is really important, as it was recently increased and it will increase more – as Fannie apparently does not want to be in the business of helping borrowers use their homes for ATMs.
Equally important is the reminder that many of these “hits” were recently WAIVED for FIRST TIME HOMEBUYERS (an enormous benefit, given the size of some of these “hits”)
When several of these “hits” are combined (condo, lower FICO, investment property, etc.), the impact to the rate can easily exceed 2%.
This is extremely important for borrowers to understand because they often come to us expecting a rate they see advertised somewhere, unaware of the fine print, only to be shocked when we quote them the actual rate.
The borrower I mention at the top of blog had an investment property that was a condo to boot – so his rate was going to be significantly higher than all of the bait and switch rates that lenders advertise.
In addition, the borrower opted for a no cost loan, where we cover all of the fees for him, and that too increases the rate by about 1/4% in most cases, as we have to capture enough additional “yield premium” to cover the fees we are paying on the borrower’s behalf.
The original Loan Officer that borrower spoke to not only failed to note ALL of the hits for FICO, LTV, CONDO, and INVESTMENT PROPERTY, he also failed to disclose the substantial fees his quote would have required even if there were no “hits.”
Bait and switch indeed.
Founder | JVM Lending
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