If a buyer is only putting down 5% on a conventional loan for a purchase, how would that affect the rate offered, compared to the 'best rate'? How about if they also have a 730 credit score and not 740 or 760 or whatever the cutoff is for 'excellent' credit these days? I'm trying to figure out how the mortgage lenders determine the interest rate if a buyer is putting less than 20% down and has a good credit score, but doesn't have a 760 or above credit score.
Good question. Loan pricing is determined in part by LLPAs (which is short for Loan Level Price Adjustments) that the agencies (Fannie and Freddie) put out. They are designed to compensate for various risk factors, including loan to value, property type, occupancy, and credit scores. Here's a great piece from Mortgage News Daily on it: http://mbslive.mortgagenewsdaily.com/knowledgebase/articles/295879-spring-2014-llpa-and-amdc-changes-comparative-tab
Note that the increases proposed (which were supposed to take affect for loans delivered after March 31st) have been delayed, so the first table shows the correct pricing adjustments. A 730 borrower who puts 5% down will incur a cost (LLPA) of .5% to his loan pricing, versus a .25% cost for a 740+ borrower. It's important to note that these are adjustments to the PRICING, not the RATE of the loan.
More questions? I'm glad to help, and write loans in all states.