The most recent Mortgage Offers Report from LendingTree helps give additional data on how rates keep evolving in the mortgage marketplace.
What does this help lenders working to close mortgages? Well, there is often a disconnect between the rate borrowers think they should get, and the rate they can actually qualify for.
Most quoted industry rates are for a hypothetical borrower with prime credit who makes a 20% down payment. Yet, most borrowers do not fit this profile and often experience disappointment when the rate on their loan turns out to be meaningfully higher than what they believed prevailing rates to be. Many loan officers have likely experienced having to explain this discrepancy to borrowers with varying degrees of success.
We believe the report can be a useful tool in talking borrowers through why their credit score has such a significant impact on their rate. Showing a market measure of different interest rates by credit score provides additional evidence that can improve the borrowers level of comfort with the differentials in pricing by credit score. For borrowers earlier in the homebuying or refinancing journey, the report can help emphasize the importance and benefits of working to get their credit score as high as they can.
From an industry perspective, stratifying by credit score allows us to see additional interesting insights about how pricing is evolving in the rising rate environment. As competition intensifies, the first observation we make is that lenders are responding by targeting higher quality borrowers. The APR spread between purchase borrowers with credit scores above 760 those in the 680-719 range has widened from 22 bps in September 2017 to 27 bps in February and was as high as 30 bps in December. In refinancing, the equivalent spread has widened from 16 bps to 24 bps.
While rates have been rising, fees have been falling. This is evident in a reduction in the spread between the interest rate and the APR. In the four months through September 2017, the spread for purchase loans was 24 bps. This has narrowed to 10 bps in February. It is lowest for loans with credit scores above 760 at 9 bps while those in the 680-719 range have a spread of 14 bps. Lenders have responded more aggressively in lowering fees for high credit borrowers as they compete for volume.
In refinancing, the dynamics are somewhat different. The average spread has narrowed to a lesser extent, down to 7 bps in February compared to 12 bps in September. There is also no meaningful difference in how the credit score buckets have changed.