Sharing the Question and Answer from Reddit (copied)
Type of program makes a big difference. FHA, VA, Conforming, and Jumbo loan types will have varying rates and varying adjustments for different credit profiles and down payment configurations.
FHA and VA will provide the best pricing as those loan are government insured/subsidized. As a result the risks of the loan are lower which allows the lender to give more favorable terms (rate)
FHA and VA today are going to run you about 3.75-3.875%
Conforming loans are loans that are saleable to FannieMae which means when a lender does the loan they already have a buyer ready to go and can unload the loan for a packaging fee to Fannie Mae. This is a low risk loan because as long as the loan fits the guidelines for Fannie Mae it will be bought and the risk is low. This loan today will run you about 4.125%-4.375%.
Jumbo is a loan that is the highest risk loan because the lender has to find an investor that will pick up the paper. If they don’t have an investor they will be forced to portfolio the loan which means to keep it on the books. If they keep it on the books sure they make the interest rate money, but it also messes with the banks liquidity. Not to mention the overall risk of having to repossess the property and incur fees associated with the process. With that, this is the most risky loan. Rates for this will run 4.375% + and will be more affected by credit score, debt ratios, and down payment. There are often adjustments that may seem odd like higher rates for CA or fees to not escrow etc. This is normal because this loan, being the most risky, has an established risk profile that is looked at by the bank very closely.
So, you can see how looking at just a rate from a bank is really useless because you may be getting a Jumbo loan and you see rates listed for VA loans on a bank website. It may say it in small print, but that’s by design. They want to get you in the door, then the can explain just as I have here WHY you may not qualify for the rate you THINK you deserve based on peoples profound knowledge of the mortgage industry and its pricing.
You may feel that we went a little deeper about rates and programs than most will, but in reality we have merely scratched the surface. We haven’t begun to look at adjustments on scale associated with fico, ltv, and down payments. We also haven’t discussed yield spread pricing or buydowns which has 90% of people yelling uncle when we start down that road.
As a lender, I can manipulate a rate to match whatever you want. You tell me you want a 4% for any loan listed above that is fine, but don’t complain that the cost of the loan may be high because I may have to buy that rate you are requesting. If your preference is to get a loan that is low or no cost then I don’t want you to comment that my rate is above what MarketWatch listed this morning. Mortgage rates and costs are see-saws you may raise 1 and see the other decrease, but you can’t lower both. Now imagine I have a tool box of weights from 1oz to 10lbs, I can place weights on the see-saw depending on how much weight your bad credit, low down payment. or program selection merits. This is a science, and Dodd-Frank made it such that you pretty much can’t get taken advantage of anymore.
So if you want to talk how a mortgage fits into your overall financial goals then talk about it, but more often than not most people aren’t on the level. They just want a “deal” but have no clue or capability to understand the intricacies of mortgage programs and pricing models. Hey my score is 800 can’t I just say I want a 2% and you do it for free…? No… Take a PAR rate at less than 1% origination and call it a day. That makes it possible for me to feed my family and you get a deal that you don’t feel screwed over. By the way, take it easy on your mortgage broker, we make like 1/3 of what we used to make, thanks Dodd-Frank.
