Loan Officers May Try to Increase Their Fees to Offset a Lower Rate Quote.
Let's say you were successful in getting several low quotes, and one company stood out in particular. It was 1/4 point lower than its three competitors. What the loan officer didn't tell you was that it also charged a $400 processing fee and a $400 underwriting fee plus a $300 application charge.
If you had received the company's GFE along with its rate quote, you would have seen that. But if you simply called around on the telephone or e-mailed some lenders, then perhaps you wouldn't have gotten the GFE or received lender or mortgage broker closing costs. Because you didn't ask. Unless you apply for a mortgage by completing the 1003, the loan officer is under absolutely no obligation to provide you with a GFE, much less one that is accurate to the penny.
If you make phone calls getting rate quotes, don't forget to ask about lender or mortgage broker charges as well. Could you ask for an APR? Sure, but unless the loan officer knows how to calculate it, you could get wildly different numbers.
When getting rate quotes, ask the loan officer to include only the lender or broker fees, and not to include other fees from third parties. If you do this, you can close the loop on tricky loan quotes.
Lenders Can Make Certain Assumptions When Quoting Rates.
When you're shopping for rates, you might find out that the 5.50 percent rate you were quoted is available only for those who have 20 percent down or more, the loan amount needs to be a minimum of $245,000, and the buyer must have a credit score of 740 or above. What if you have only 5 percent to put down, your credit score is 621, and your loan amount is $75,000? Then you won't get the lowest rate.
Lenders use what is called a loan level pricing adjustment, or LLPA, that attempts to assign different rates to various degrees of risk. Those with excellent credit, a 25 percent down payment, and a large loan amount make the lender happy and secure, knowing that the loan application is essentially a "no brainer" and that this borrower deserves a better rate than someone with little down and a marginal credit score.
The LLPA is a matrix that adds a certain number of basis points to a particular interest rate based upon a credit score and the amount of down payment or equity that the borrower has. Interest rates can vary as widely as a full percentage point based on these variables.
Loan officers will typically quote you their best rates, and as long as all lenders do that, your rate shopping will be easier. But if one loan officer says something to the effect of, "With 20 percent down, a minimum loan amount of $250,000, and a credit score of 750 or more, our rates are 6.00 percent," that loan officer is using the LLPA when quoting you rates. If in fact you are somewhere between the "best" and "worst" rate quotes, your rate will be slightly higher than the absolute best offering. But it's up to you to let the loan officer know in advance what he's actually quoting on.
In order to make an accurate rate quote, loan officers are supposed to ask you the type of loan you're looking for, your loan amount, your credit grade, and how much down payment you have. If they don't, and if you don't tell the loan officer that your credit score is 650, you're going to be surprised when you go to lock in your loan; your rate might be higher than what's being quoted elsewhere.
Currently, the LLPA is used on conventional loans only.