July 12th, 2011
In the article “Want a Great Loan? Work the Boundaries” Nate Moch points out that it takes a specific mix of numbers to get the very best rate possible. Limits are placed on loan amounts, down payments and credit scores, and these limits are used to determine your rate. Like Moch says, just $1 can significantly change your rate. And over time, a seemingly small difference in rate can make a big difference, as Moch’s example shows:
For example, lowering your rate by .5 percent — going from a rate change of 5 percent to 4.5 percent — could save you $45,000! This example is based on a $416,000, 30-year-fixed mortgage.
Here’s what you need to know about each boundary before you begin your home and mortgage search:
Loan amount specifications:
There are three boundaries on loan amount that could decide whether or not you get the best rate possible. Moch explains that Fannie Mae and Freddie Max are government-sponsored entities (GSEs) that are constantly buying loans from lenders. When a loan is purchased, the lender is able to offer a lower mortgage rate to go along with it because the expense is no longer on their balance sheet.
But like anyone else purchasing a loan, the GSEs have specifications that the loan must meet in order to buy it. And when they do buy it, there are addition specifications that determine the rate you will pay, as explained below:
Less that $417,000. This is the standard loan limit. If you find a home that you can purchase with a loan less or equal to this amount, you’re more likely to get the lowest rate. This is important to know before you begin the home search, so then you can keep your eye open for homes that meet this qualification.
At or below county limits. There is an exception to that rule. In areas where the average home prices are higher than $417,000, the limit may expand up to $729,750. These homes will have a slightly higher rate (Moch says .125 points higher). But if you find a home in one of these areas that still meets the $417 limit, you’ll get a great deal.
Above county limits. Any loan above county limit is called a “jumbo” loan, and will result in a rate as much as .5 percent higher due to the risk.
It’s important to know these limits because your rate is extremely dependent on them. If you find a home you love and the loan amount is slightly higher than the boundary, you can try to increase your down payment – thus decreasing the amount of the loan – or negotiating price with the seller.
Down payment specifications:
Down payment boundaries are determined by percentage, not by amount – the amount you’re required to put down is determined by the cost of the home you’re purchasing. So, if you’re purchasing a $200,000 home, 10 percent down would be $20,000, whereas with a $300,000, 10 percent down would be $30,000.
20 percent down. If you can afford to put 20 percent down, you will typically get the best rate available. If you can afford 18 percent or 19 percent now, considering increasing your down payment or waiting a month or two to save up the additional funds.
10 percent or 5 percent down. These are common down payment amounts, so rate cutoffs are usually found around these numbers. For example, 10 percent down could get you a better rate than 9 percent down. 5 percent down is the minimum for Fannie Mae conforming loans, and 10 percent is the minimum for jumbos.
3.5 percent down. This is the lower limit for FH A loans, making it an attractive loan product for those who can’t afford a big down payment. You probably won’t find a loan that requires less than that.
Credit score specifications:
Credit score is an indicator of risk. The higher your credit score, the lower your risk, and the lower the rate you’ll get. Keep in mind that your credit score can be raised with little effort if you take the time to investigate where you could improve. So, if your score is close to one of the boundaries, it’s worth it to work on it before purchasing the loan.
760. This score or higher will get you the best rate possible.
720. This is the historical cutoff for the best rate, and you will not get any negative rate adjustments.
660. This is the typical minimum for conventional loans. Though it’s possible to get a loan with this credit score, you’ll pay a higher rate.
620. This is the minimum for Fannie Mae, but most of the loans that Fannie Mae ha to offer require 660.
580. This is the minimum credit score for an FHA loan.