Risk Based Pricing is a term now used by mortgage lenders to refer to how mortgage loans are Priced.
A mortgage with a higher risk to the bank has a higher price, or interest rate. A loan with a lower risk of default for the back, has a better price / rate.
There are several factors that currently make up the "risk" matrix. Here are a few of the items that might affect the rate:
- Borrower Credit Score and Capacity to make payments (Debt to Income Ratio/ DTI)
- Property Condition and Location
- Documentation Type (did you provide income documentation and asset statements / or did you just "state" your income and assets?)
- Mortgage Insurance
- Amount of DownPayment (or LTV / Loan To Value Ratio)
- Loan Type (Fixed or ARM) and Loan Purpose (is it a purchase or cash out refinance?)
USDA has fairly tight regulations on minimum credit scores, credit history and DTIs. USDA Mortgages are also regulated by location and they impose minimum standards for property condition. All USDA Mortgages must be full document loans, so proof of income and assets are requried. USDA Home Loans also have a "funding fee" that covers part of the expense if the loan defaults (so it works as a form of PMI, or mortgage insurance)
USDA Home loans are 100% mortgages! There's no downpayment requirement. Even though it is a pretty conservatively underwritten loan, the fact that the homeowner does not have to make a downpayment makes this a slightly riskier loan for the bank. Because of this... USDA mortgages have a SLIGHTLY higher cost associated with them... for instance, if today's FHA mortgage "price" / rate was 5.5% - then a USDA Mortgage Loan would likely be 5.75%. STILL a REALLY good rate - just slightly above the FHA rates.
If you are interested in learning more about USDA Mortgage Loans in the Wake, Johnston and Durham County click here.
For more information on how to qualify for a USDA Home Loan in NC, click here.
If you have questions about qualifying for a USDA mortgage, given your credit scores, please click here. Note, USDA does not have minimum score requirements, however, most BANKS require at least a 620 score. We do have sources for USDA loans with lower scores, however, because of the additional RISK, the rates are higher.
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