Most don’t qualify for lowest rates according to Zillow

by Gina Pogol
September 27th, 2010

Folks at Zillow studied over 25,000 loan inquiries and concluded that most people did not qualify for the lowest mortgage rates available. This is attributed to the changing lending environment as well as tough economic times taking their toll on borrowers’ credit scores.

Conventional mortgage pricing penalizes more than it used to

In the past, you were either approved for your typical conforming mortgage or you were declined. Period. Someone with a 640 credit score was pretty much equal to an applicant with a 740 score as far as Fannie Mae or Freddie Mac were concerned as long as the underwriting software came up with an approval.

Today it’s not like that — mortgage pricing changes every twenty points along the credit score continuum. For example, someone with a 639 score pays more than someone with a 640 score, who pays more than someone with a 660 score, who pays more than the guy with a 680 score, and so on. In fact, Zillow concluded that every twenty point score drop imposes an APR increase of .12% on the best deal you can make. So if you have a score of 740, you might be offered 4.5%, but if you’re at 640 you get 5.10% for the same price.

Is this conclusion necessarily true?

Loan Level Pricing Adjustments, or LLPAs, are attached to conforming loans, those bought and sold by Fannie Mae and Freddie Mac. But FHA borrowers pay the same regardless of what their credit scores are. So FHA applicants would seem to be less afflicted by these penalties but the Zillow folks didn’t separate them out. So, if you take out the FHA folks the difference might be even greater in a pool of just conforming borrowers. In addition, they were looking at only offers resulting from Zillow inquiries, not at actual loans. It stands to reason that you might make a lot of inquiries but only close a mortgage when you get a good offer.

How do you get the best mortgage rate you qualify for?

First, unless you are at the top of the mortgage-borrowing food chain, with great credit and a big down payment or chunk of home equity, get several mortgage quotes and be sure you include some FHA lenders in the mix. Second, make sure you get meaningful quotes by letting the lenders know what your credit score is (you can get that from www.annualcreditreport.com), how much equity you have (or down payment), and what the house price or value is.

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