SANTA CRUZ (March 27, 2010) - It is human nature to want to know what your neighbor paid for her car or her new dishwasher or her new bicycle but as everyone knows, when it comes to cars, dishwashers or most anything else one can purchase, there are innumerable options with a corresponding number of pricing options. It is the same with mortgages. It would be a coincident if two neighbors or two friends had the same set of circumstances and received the same mortgage rate, term and fees. There are just too many variables.

Now more than ever before, good borrowers are rewarded with the best rates. The mortgage industry calls it ‘risk-based pricing’. While this makes sense, the definition of a good borrower is not always obvious. Clearly, it is a borrower’s credit score that gets most of the attention from the mortgage industry. Credit scores range from 350 to 850 and unless a borrower has a credit score of at least 640, most lenders are not even willing to provide a loan. Earning a high score is relatively easy: have at least three credit cards, use them and make your credit card and installment payments on time, every time and keep monthly balances to a minimum. Borrowers that either do not have credit accounts or have only one or two will probably not have an adequate credit history to have a good score. A borrower with a credit score of 640 will pay a ‘penalty’ of up to 3 points ($12,000 on a $400,000 loan) when compared to a borrower with a credit score of 740.

Just a couple of years ago many lenders, including Freddie Mac and Fannie Mae, were offering 100 percent financing, loan-to-value (LTV). Guidelines have gotten much stricter since then. With today’s risk-based pricing, lenders are not only concerned about a borrower’s credit score but are also paying special attention to the LTV ratio of the purchase or refinance transaction. For pricing a loan, we must use a matrix that takes into account credit scores, type of transaction and LTV ratios. The higher the LTV, the higher the price and/or the rate for the loan.

Lenders also focus on a borrower’s debt-to-income (DTI) ratio. With a low down payment for a conventional loan, say 10 percent, a borrower’s DTI ratio must be at or below 41 percent or the loan will be denied. An investor that would approve a loan with a higher DTI ratio may do so with compensating factors (high credit scores, a large amount of cash leftover after the loan closes, etc.) but may charge a slightly higher rate and/or fee for doing so.

Lenders charge lower fees when asked to lock a loan in for a short period of time. For example, a homebuyer who needs to lock a loan in for 60 days will pay more in fees when compared to a borrower who is locking in a rate for just 15 days. The difference can be $1,000 or more for a $400,000 loan. How the borrower plans to use the property also makes a difference. A borrower who will rent the house will have to pay as much as $12,000 more for a $400,000 loan than a borrower who will occupy it as a principal residence.

It should be clear by now that no two borrowers will have the identical profile and, therefore, will more than likely receive different rates and/or fees from the same lender.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.