"I recently found what appeared to be the best deal on a 30-year fixed-rate mortgage from ads in the newspaper, but when I told the loan officer exactly what I needed, the price rose and the amount I could borrow fell. I figured he was pulling a bait-and-switch on me, and broke it off. Then I found an equally good quote by a mortgage broker on the internet, but when I contacted him the exact same thing happened…What's going on? I need the loan to buy a condominium to rent out."
Market Nichification
You're befuddled by a unique feature of the US mortgage system that complicates life for mortgage shoppers. I call it "market nichification". It simply means that lenders vary the terms they offer borrowers based on a large number of loan, borrower and property characteristics that they believe affect the risk or cost of the loan to them.
Your case is an example. Lenders consider loans that are used to purchase a property for investment riskier than loans used to purchase a property that will be occupied as a residence by the borrower. To compensate lenders for the risk, these loans carry a rate higher than that on loans for personal occupancy.
In addition, the maximum amount you can borrow on an investor loan is smaller than the amount you can borrow on a loan for occupancy. While the precise figures will vary a bit from lender to lender, you will find yourself paying more and able to borrow less no matter which lender or mortgage broker you solicit.
Some Market Niches
Here are some other factors that could have the same effect. A more complete list is shown further below:
* The borrower does not have permanent residency in the US.
* There is a co-borrower who won't live in the house.
* There will be a second mortgage on the house.
* The house is a condominium with more than 4 stories.
* The borrower wants to avoid tax and insurance escrow payments.
The number of niches is enormous because of all the different combinations of the features that define niches, such as those listed above. Software developed by GHR Systems, Inc., which many major lenders use to make pricing adjustments, allows lenders to enter up to 40 million prices for each loan program. A second loan program could have a different 40 million. While no one lender uses any significant part of this capacity, in combination the lenders using the system price for several million niches at least.
Implications of Market Nichification For Mortgage Shopper
Shoppers need to understand that no lender operates in every niche, and the narrower the niche, the fewer the lenders. In a survey of 15 national lenders that I did in response to the letter cited above, I found that all 15 made investor loans on 30-year fixed-rate mortgages. However, only 9 of them made investor loans to borrowers who were doing a cash-out refinance, and only 4 were also willing to waive standard loan documentation requirements. On adjustable rate mortgages, furthermore, the number fell to 2.
Another thing shoppers need to understand is that the lender offering the best deal in one niche is very unlikely to be the one offering the best deal in another niche. In a study of 13 lenders operating in 19 niches that I did some time ago, I found that 12 of them offered the best deal in at least one niche. Further, no one of the lenders offered the best deal in more than 3 of the 19 niches.
Nichification is a major reason why mortgage brokers have become such a major part of the market in recent years. Since mortgage brokers deal with multiple lenders, usually 30 or more, they are well positioned (as consumers are not) to identify the lenders who operate in a particular niche, and select the best of the available deals.
To shop effectively, consumers need to locate themselves in the correct market niche beforehand. (This is what the letter-writer did not do.) Otherwise, the shopper does not know whether the information collected reflects niche pricing or not. It also helps to have some idea of how your particular niche is priced. Below is a list of the major niche factors, and some selected illustrations of niche pricing.
Niche Factors
All the factors listed below are used by at least some lenders in pricing mortgages.:
Transaction Characteristics:
1. Loan Amount
2. Desired Lock Period in Days
3. Down Payment (As Percent of Property Value)
4. Term
Property if Not Single-Family Detached:
5. Two-Family
6. Three-Family
7. Four-Family
8. Co-op (Building Is Owned by a Cooperative Association in Which
Members Own Shares)
9. Condominium (Borrowers Owns Unit in a Project in Which Some
Facilities Are Owned in Common)
10. Condominium More Than Four Stories High
11. Manufactured (House Was Not Built on Site)
12. Attached ("Twin", "Triplex", "Row")
13. Planned Unit Development (House Is Located In a PUD With a
Homeowners Association That Charges Dues)
Loan Purpose if Not to Purchase for Occupancy as Permanent Home:
14. Purchase Second Home (Vacation Home)
15. Refinance
16. Cash-Out Refinance (Loan is Larger Than Old Loan Balance By an
Amount Larger Than th e Settlement Costs)
17. Investment (Home is Being Purchased to Rent Out)
Documentation If Not Standard:
18. Alternative Documentation (Borrower Wants to Provide Payroll and
Bank Statements Rather than Wait For Verification of Information from
Employer and Bank)
19. Documentation for Self-Employed (Borrower Wants to Use Special
Documentation Requirements Available for the Self-Employed)
20. No Income Verification (Borrower Doesn't Want Reported Income to Be
Verified by the Lender)
21. No Asset Verification (Borrower Doesn't Want Reported Assets to Be
Verified by the Lender)
22. "No Docs" (Borrower Doesn't Want Reported Income or Assets to Be
Verified by the Lender)
23. No Income Ratios (Borrower Doesn't Want Income to Be Used in
Determining Qualifications)
24. Streamlined Refinance (Borrower Wants the Reduced Documentation
Requirements Available on Refinances Only)
Special Borrower Characteristics
25. Non-Occupant Co-Borrower (One of the Borrowers Won't Be Living in
the House)
26. Subordinate Financing (There Will Be a Second Mortgage On the
Property When the New Loan is Made)
27. Non-Permanent Resident Alien (Borrower is Employed in the US But Is
Not a US Citizen or Permanent Resident )
28. Non-Permenent Non-Resident Alien (Borrower is Not a US Citizen and
is Not Employed in the US)
29. Waiver of Escrows (Borrower Wants to Be Responsible For Payment of
Taxes and Insurance)
Some Examples of Niche Pricing on a 30-Year Fixed-Rate Mortgage
Any of the factors listed above, alone or in combination with others, may affect the interest rate, points, maximum ratio of loan amount to property value, and sometimes other qualification requirements. Below are a few common examples, but the actual numbers shown may vary from lender to lender. They also change over time, and since those below are a few years old, readers should view them as rough indicators. All the adjustments shown are relative to the following "reference" loan:
* Loan Amount: $200,000
* Rate Lock Period: 30 days
* Purpose of Loan: Purchase for occupancy as permanent home
* Type of Property: Single-family detached
* Maximum Ratio of Loan to Property Value (LTV): 95%.
| Adjustments to: | |||
| Niche Feature | Interest Rate | Points | Maximum LTV |
| Loan Amount | |||
| $50,000 | +.125% | ||
| $460,000 | +.25% | 90% | |
| $900,000 | +.375% | 80% | |
| Lock Period | |||
| 60 days | +.125 Points | ||
| 90 days | +.375 Points | ||
| 120 days | +.750 Points | ||
| Purpose of Loan | |||
| Refinance | 90% | ||
| 2nd Home Purch | 90% | ||
| Refi Cash-Out | .125% | 75% | |
| Investment | +.375% | 70% | |
| Refi Cash-Out/Investment | +.50% | 60% | |
| Type of Property | |||
| 2-Family | 90% | ||
| 3/4 family | 80% | ||
| High-Rise Condo | +.25% | ||
| FICO Score | |||
| 681-720 | +.125% | ||
| 621-680 | +.375 | ||
| 580-620 | +1.25% | ||
| Other | |||
| No Income Verification | +.25% | 70% | |
| Escrows Waived | +.25% | 90% | |