Robert Nusgart: Price adjustments come even at 20% down

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I’ve heard the line many times.

“I have a 780 credit score and I’m putting down 20 percent. They should want me as a customer.”

Well, they do. But now, even the most creditworthy borrowers are being hit with pricing adjustments that just a few years ago would have been thought to be ludicrous by every loan originator.

Fannie Mae recently revised its loan level pricing adjustments, making loans more costly to consumers.

When a loan officer calculates what interest rate a person can get for a mortgage, many factors come into play. Credit score, loan to value, and whether the transaction is a cash-out refinancing are just a few variables that are put into the equation. Fannie Mae puts out a grid that equates the various risks and assigns a pricing adjustment that can either be absorbed into the interest rate or passed on to the consumer or a combination of both.

There was a time when a borrower who was putting down 20 percent on a purchase and had at least a 680 credit score would likely get the very best rates available with no internal pricing adjustments. They were considered great borrowers.

That has changed. Now if you have a 680 credit score and are putting down 20 percent on a home purchase, Fannie Mae is going to hit the lender with a price adjustment equal to 1.75 percent of the loan amount. That kind of adjustment is capable of raising a borrower’s interest rate by about half a percentage point.

But what about people with credit that is outstanding? No lates. No high balances. Depth of credit as well as varied credit. These are people who have demonstrated that they know how to handle credit in the highest manner.

And not only do they have credit scores above 740 — the highest bucket by most standards — but they are willing to put down 20 percent. Should they too have an adjustment? Fannie Mae says yes.

Now, those borrowers are going to be hit with a .250 adjustment that also may influence their rate. Instead of getting 5 percent on a 30-year fixed rate mortgage, maybe they get 5.125 percent.

Is that fair? On the surface it certainly doesn’t seem to be. But those inside Fannie Mae would most likely tell you that the adjustments are based on just how those loans are performing and that there might be hiccups within that pool of the most qualified borrowers. So to avoid any pricing adjustment and to get the very best terms, Fannie Mae wants borrowers to put down 25 percent.

The bar has been raised.

100 pennies

How tight have underwriting guidelines gotten? Here’s a true story.

A fellow loan officer was sending a loan through an investor who deals primarily with jumbo loans — those typically over $417,000. This investor has some of the best interest rates available in the business.

The investor’s guideline for debt-to-income ratio was 45 percent. If you are at or under it, you get the loan. If you are over it, you don’t.

The borrower was slightly over the 45 percent cutoff. He needed to eliminate $133 in revolving debt to be just under 45 percent. He recently charged the purchase of a mattress, and the monthly payment was $132. Simple solution was to pay off the debt, and that should be close enough.

Wrong.

When the underwriter calculated the new debt-to-income ratio, it came out to 45.00004 percent.

“We have a problem,” the underwriter told my associate. “We’re over 45 percent.”

Astonishment took over.

“No, we’re at 45 percent,” he replied, and then asked how many zeros they would go out, not to mention that we wouldn’t be rounding up.

He was told the zeros go on forever and that it didn’t matter — the borrower was above the threshold of 45 percent.

“It’s a dollar,” he screamed back to the underwriter. Meanwhile, a secretary quickly pushed a dollar into his hand only for it to be promptly shredded by anger.

“It’s over 45 percent,” the unflinching underwriter responded back.

Guess who won.

If you picked the underwriter, give yourself a big pat on the back.

Ultimately, the jumbo loan amount was lowered by approximately $200, bringing the debt-to-income ratio happily below 45 percent.

Now try explaining that to a borrower.

But it is only one of many stories loan officers nowadays can tell that illustrate the nature of mortgage lending in 2011.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.