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Mortgage

Understanding Why Mortgage Rates Vary by Lender

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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The homebuying process can be exciting, challenging and stressful. One of the biggest aspects is getting a mortgage so you can afford to buy a home in the first place. And of course, you’ll want to secure a mortgage that gives your best terms possible. One of the first things you’ll notice is that mortgage interest rates vary from lender to lender. In fact, they can vary a lot. That’s important when you consider that a difference of 1% can result in thousands of dollars more in interest down the line.

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Given the amount of variability among interest rates, shopping around is essential. Research from Freddie Mac finds that getting just one additional mortgage rate quote saves homebuyers an average of $1,500 over the life of a loan. Getting five quotes saves an average of $3,000.

By understanding why rates differ so much from lender to lender, you can better prepare yourself for the mortgage search process — and set yourself up for success.

Why do rates differ by lender?

There are a number of reasons mortgage rates differ — and change so quickly over time. Larger economic trends are one major factor. Interest rates fluctuate due to factors such as the Federal Reserve policy, the bond market, inflation and economic growth. The housing market itself also has an impact. When fewer homes are being bought and sold, this lowers the demand for mortgages and thus has a downward effect on mortgage rates. Other differences are more specific to the lenders themselves:

Competition. Just like with any other business, competition is usually good for keeping prices down for consumers. So if you live in an area with a lot of lending options, lenders may offer more competitive rates to bring in business.

Risk assessment. Each lender has its own team of underwriters and risk assessment guidelines. Using their guidelines, one lender might find a borrower higher risk than another lender would, and therefore charge a higher rate. For lenders who give loans to “riskier” borrowers (such as online lenders who often give loans to people with lower credit scores), interest rates would also be higher.

Funding costs. It costs money to lend money, so each lender will have its own costs, which could influence the interest rates it offers.

Operating expenses. How much it costs to run each lending institution will vary depending on whether the lender is a large brick and mortar bank, a small community bank or an online lender.

Profit margin. Most lenders are for-profit, so they will want to make money off of each loan, which will determine the interest rate they charge. Credit unions, though, are nonprofit and usually offer lower loan interest rates than banks because they have lower profit margins.

Why is my rate different from the advertised rate?

When you’re shopping around for mortgages, you may find that the rate a particular lender advertises is different than the one you are offered. That’s because the rate you’re quoted takes into account multiple factors unique to your situation.

Credit score. Your credit plays a very big factor in your interest rate. Typically, the higher your credit score, the lower the interest rate you’ll be offered.

You can get an idea of how your credit score and other factors affect the loan rate you can expect by using the Consumer Finance Protection Bureau’s Explore Interest Rates tool. The tool gives you an idea of average interest rates by taking into account your credit score, the state where you’re taking out the loan, the size of your mortgage, your loan terms and the size of your down payment.

Loan terms. The details of your loan also play into the equation. Most lenders advertise rates for “ideal” situations. For example, many assume a fixed-rate loan with a 20% down payment. The size of your down payment is essential, as you’ll typically get a lower interest rate if you make a larger down payment. You may also pay more for a loan that’s either unusually small or large.

The loan’s term, or how long it is, is another variable that may result in a rate different than the one advertised. In general, the shorter the term, the lower your interest rate and overall costs will be, although your monthly payments will be larger.

Whether your loan is fixed or adjustable is another factor. While a fixed rate stays the same over time, an adjustable rate will go up or down based on the market.

The type of loan you’re seeking is another consideration. You’ll likely see different rates for a conventional loan versus an FHA loan,VA loan or USDA loan.

Loan-to-value ratio. Your loan-to-value, or LTV, ratio is another essential calculation that has an impact on your rate offer. Your LTV is the relationship between the amount you’re borrowing and the overall value of the home. The larger your down payment, the lower your LTV will be. You may be quoted a higher interest rate if you have a high LTV.

In general, lenders look for an LTV of 80%. If your LTV is above 80%, you’ll likely have to pay for private mortgage insurance to help protect your lender until you build up at least 20% equity in your home.

APR vs. interest rate

As you’re shopping around for a mortgage, you’ll want to consider the interest rate offered by the various lenders. This shows you the cost of borrowing the money. In addition, you’ll want to review the annual percentage rate, or APR.

The APR gives you a fuller picture of how much the loan will really cost you because it includes not just your interest rate but also costs like broker fees, any points you might be paying to get a lower interest rate and other fees you’ll be charged.

The formula for calculating APR is as follows:

Fees (origination and interest) / principal (including closing costs) / number of days in the loan x 365 x 100

Let’s assume you have a 30-year, fixed rate mortgage of $250,000 with a 4.5% interest rate. If your closing costs equal 2% of the loan ($5,000) and you pay a 1% origination fee ($2,500), using an online calculator, your APR would equal 4.75%.

Do rates vary by state?

Geography plays a role in mortgage rates. Interest rates likely will vary from state to state for several reasons, including

Foreclosure rates and laws. If there’s a high incidence of foreclosure in a certain area, this can increase the costs for a lender, which they then pass on to you in the form of higher interest rates.

The cost of doing business in a given state is also important. If it’s more expensive to operate due to state taxes and wages, these costs may be reflected in the mortgage.

Population. Heavily populated areas with multiple lenders may offer lower rates because they have more competitors for your business. But on the other hand, while lenders in less-populated may have fewer competitors, they also have fewer customers to choose from. That may compel them to offer lower rates, too.

If I lock in my rate, can I renegotiate if rates go down?

As you’re shopping around, potential lenders will likely encourage you to lock down a rate. Because interest rates are constantly fluctuating, a rate lock can help you eliminate the risk that you’ll pay a higher rate than the one offered now.

Once you lock in a rate, the lender will guarantee that rate to you for a set period of time — they typically require that you close within 30 to 60 days. Note that you will usually pay a fee to lock down a rate.

It’s important to know that a rate lock doesn’t guarantee that you’ll still qualify for the same rate when you close. For example, if you face issues with your income verification or credit, or if your home appraisal hits a snag, the rate may be adjusted.

One downside to a rate lock is the possibility of rates going down. If that happens, you’re likely stuck with the original higher rate that you locked in. If you are concerned about that possibility, consider adding a float-down provision to your rate lock. This will allow you to adjust your rate should the rates go down.

Bottom line

There are many factors that influence the mortgage interest rate you’re offered. Some are factors you bring to the table like your credit score and the size of your down payment, while offers are based on the individual lenders. It makes sense to do some comparative shopping and get offers from at least a few lenders to get your best rates.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

How to Recover From Missed Mortgage Payments

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.