We pre-approved a borrower in August and sent him numerous estimated payment scenarios, based exactly on the interest rates available at that time.
When he went into contract in mid-September, we locked him at a 1/4% higher rate than what we estimated in August.
The borrower was upset because he thought we pulled a “bait and switch.”
BUT, the only reason his rate was higher at contract time was that rates had increased a full 3/8% since we pre-approved him.
We are in fact one of the few lenders that quotes authentically available rates during the pre-approval stage and that does not “bait and switch” (some online lenders are infamous for this).
In any case, we were able to show the borrower how much the market moved and that we actually “ate” 1/8% of the rate increase ourselves, and he was assuaged.
Reasons Why Rate Might Be Higher At Contract Time
There are several reasons why buyers’ rates might be higher when they get into contract.
- The market moves. As illustrated above, interest rates can go up quickly over short periods.
- Credit score drops. Credit scores can influence an interest rate by as much as 1%, as we remind readers often, and credit reports only remain valid for 90 to 120 days. Hence, we have to pull new credit reports when borrowers end up in contract over 120 days after we pre-approve them. A single late payment, or running the report when balances are high can easily reduce a score by as much as 50 to 100 points, and we see this happen often.
- Credit Score Confusion – Consumer Credit vs. Mortgage Credit. Sometimes borrowers ask us for a rate quote based only on their “estimated credit score” they obtained from an online consumer credit monitoring service like Credit Karma. Consumer credit scoring models are, however, much less stringent than mortgage credit scoring models. As a result, the mortgage credit scores we pull are often much lower than a borrower’s consumer credit score.
- Property Type Change. If a borrower is planning to buy a single-family residence with 5% down, and then ends up buying a condo instead, his rate will be 1/4% higher (or more, depending on credit score).
- Down Payment Change. Down payment %’s can also significantly affect interest rates. Hence, if a borrower decides to put down only 20% instead of 25%, his rate will likely be at least 1/8% higher (or more, depending on credit score).
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167