Calculating Case-specific Loan Terms

It takes detailed knowledge and experience to correctly evaluate each case, determine applicable loan terms, and secure approval accordingly. Our company excels at all of these tasks, and our clients also take comfort in knowing that the closing cost breakdowns we provide are guaranteed to be 100% complete and accurate, including all third party and recording fees.

How exactly the terms of a particular loan are established?

In essence, the terms are established by identifying all applicable risk-based adjustments and applying their cumulative to base (best-case) pricing. Base pricing information becomes available every morning soon after market opens. Pricing changes daily and may also fluctuate during the day, depending on market volatility.

What are risk-based adjustments?

Risk-based adjustments modify best-case loan pricing to compensate for risks associated with certain loan characteristics. For example, a borrower with 740 credit score seeking a rate/term refinance on a single family home represents significantly lower risk than a borrower with 660 credit score seeking a cash-out refinance loan on a 4-unit multifamily. The later is subject to multiple risk-based pricing adjustments resulting in significantly worse loan terms. Adjustments are set by secondary market investors (i.e. Fannie Mae and Freddie Mac) based on their risk analysis. Adjustments change with evolving market - scenarios which were not perceived as risky earlier may present higher risks today. Adjustments apply to cost (i.e. points), not rate, although the adjustments may, subject to market conditions, be covered through a rate increase instead. More on risk-based adjustments.

What is “loan pricing”?

Loan pricing is represented by multiple rate/cost combinations (rate A with zero points, rate B with 0.5 points, rate C with 1.0 points, and so on). For each particular loan scenario there are various rates available, each having its own price, the lower the rate the higher the price. Quoted pricing is correct only if all applicable adjustments are accounted for. Inexperienced loan officers may easily omit applicable adjustments and quote pricing information incorrectly.

Examples

Case 1: Rate/term refinance of single family primary residence with credit score of 740, loan amount 200,000 and Loan-to-Value Ratio (LTV) of 80% on a 30 year term product. Checking adjustment tables reveals the following applicable adjustment: FICO of 740+ with LTV 75-80 - 0.25 points, which will be added to best-case pricing. The borrower with this scenario will pay 0.25 points more for the same rate than the best-case scenario borrower.

Case 2: Cash-out refinance of single family primary residence with credit score of 720, loan amount 200,000 and Loan-to-Value Ratio (LTV) of 80% on a 30 year term product. Checking adjustment tables reveals two applicable adjustments: from Agency FICO/LTV grid, FICO 720-739 with LTV 75-80 results in 0.50 price "hit". Additionally, from a separate Agency Cash-out Refi FICO/LTV grid, cash-out with this FICO and this LTV results in 0.75 "hit". The cumulative adjustment is then 0.50+0.75=1.25 points, which will be added to best-case pricing. The borrower with this scenario will pay 1.25 points more for the same rate than the best-case scenario borrower.