People have a lot of misconceptions when it comes to mortgage interest rates. Many people assume the same interest rate applies to everyone. That was true many years ago, but the mortgage industry has become much more sophisticated since then. Interest Rates are based on the assumed risk the lender is taking based on many factors. These factors include a Borrower’s Credit Score, Loan To Value, Loan Amount, Property Type and Program.
The mortgage industry uses the “mid” credit score of the 3 credit bureaus for pricing a loan.
Conventional mortgages require a 620 minimum credit score. In general, if your credit score is between 620 and 740, there will be an increase to your interest rate. The higher the credit score the less the increase. Typically, people with a score >740 have no adjustment.
FHA is more lenient on credit score. The minimum required credit score depends on the Lender. Insight Loans only requires a 560 credit score on FHA and even less under some circumstances. In general, the interest rate will increase only if your credit score is below 620.
VA is also more lenient on credit score and the minimum required credit score depends on the Lender. Insight Loans only requires a 580 minimum credit score on VA. In general, the interest rate will increase only if your credit score is below 620.
USDA requires a 640 minimum credit score. The program is ZERO down and has low monthly PMI so the credit requirements are tougher. In general, the credit score is the same with any credit score on USDA loans.
Loan To Value (LTV)
Loan To Value is the calculation of how much down payment or equity is in a house.
For Example, if you are putting 5% down on a purchase you have a 95 LTV. If your house is worth $100K and you owe $80K you have an 80 LTV. In general, the higher the LTV the higher your effective interest rate.
Both small and large loan amounts can cause an increase to your interest rate. In general, small loan amounts under $100K can cause your rate to go up. Also, large loan amounts over $424,100 are considered “Jumbo” and the interest rates are higher.
The type of property will affect your interest rate. Investment properties or Rental properties have the highest interest rates because Lenders consider such properties riskiest. A Primary Residence that a borrower lives in full time and Second Homes/Vacation Homes have no adjustment to the interest rate.
Program for your Mortgage Interest Rate
The type of mortgage program will affect your interest rate. In general, the shorter the term of the mortgage the lower the interest rate. For example, a 15 year fixed has a lower rate than a 30 year fixed. Adjustable rate mortgages (ARM) also have a lower start rate than a fixed rate mortgage, but will adjust over time based on the type of ARM.