What Is Risk-Based Mortgage Pricing?

Risk-based mortgage pricing is when lenders offer loan terms and conditions to applicants based on their credit history. Risk-based mortgage pricing may involve offering less favorable loan terms to those with a poor credit history and more favorable terms to those with a solid 澳洲幸运5官方开奖结果体彩网:credit history. Typically, 澳洲幸运5官方开奖结果体彩网:mortgage lenders assess a borrower's credit history and charge a higher interest rate to those with a track record of late payments or an increased risk of default.

Understanding Risk-Based Mortgage Pricing

Mortgage lenders offer varying interest rates and loan terms to different borrowers based on a grading of the 澳洲幸运5官方开奖结果体彩网:creditworthiness of each borrower. Lenders 澳洲幸运5官方开奖结果体彩网:grade borrowers and offer different rates and terms based on several criteria, including the borrower's 澳洲幸运5官方开奖结果体彩网:credit score, payment history, and the 澳洲幸运5官方开奖结果体彩网:loan-to-value (LTV) ratio of the mortgage. Risk-based pricing is commonly used by Alt-A and subprime lenders.

Risk-based mortgage pricing is similar to practices used by creditors of other types of loans, such as credit card companies and car loan financing lenders. These lenders typically offer better deals and terms to applicants with better financial 🧜circumstances and credit histories.

When making a loan or credit approval decision, mortgage lenders gauge the risk or likelihood a borrower might fall into 澳洲幸运5官方开奖结果体彩网:delinquency or default on the 🌠loan. From there, the len💞der offers a loan package based on those risks.

Factors that Can Negatively Impact Your Credit

Borrowers with 澳洲幸运5官方开奖结果体彩网:credit issues will likely receive a less attractive interest rate than borrowers with a positive credit record. Some of the adverse issues that can affect a lender's decision to give you favorable loan term🍒s include:

• 澳洲幸运5官方开奖结果体彩网:Bankruptcy
• 澳洲幸运5官方开奖结果体彩网:Foreclosure or a credit discharge where the borrower has defaulted on an outstanding debt
• Recently unemployed
• Late payments
• Too much debt
  

Prohibited Factors

Varying credit terms based on a borrower's credit history and risk profile is standard practice in the financial industry and completely legal. However, lenders cannot use legally prohibited factors in determining terms or approval decisions for mortgage or credit applications. These prohibited factors include:

• Age
• Race
• Gender
• Religion
• Marital status
• National origin
  
• Receive public financial assistance

If a creditor offers a borrower less favorable terms based on information within their 澳洲幸运5官方开奖结果体彩网:credit report, the lender will send the borrower a notice informing them of the factors that went into their credit decision.

Benefits of Risk-Based Mortgage Pricing

Although ri🎉sk-based mortgage pricing gr🍷eatly benefits lenders, borrowers can also benefit.

Benefits to Lenders

Risk-based mortgage pricing benefits the lender because it protects them against default. The higher interest rate charged to borrowers with lower credit quality makes up for the increased risk of lending them money. The practice a🎉lso benefits borr꧅owers with a good credit history since they can get rewarded with a low-rate mortgage.

Benefits to Borrowers

Risk-based mortgage pricing also helps individuals with a poor credit history 澳洲幸运5官方开奖结果体彩网:get appಞroved for mortgage financing that they might not otherwise qualify for d🥀ue to their poor credit score o💯r other limiting factors.

Because a high-risk borrower can get charged an 澳洲幸运5官方开奖结果体彩网:interest rate above the standard rate, a bank will be more comfortable lending them money to buy a house. As a result, a high-risk borrower can improve their financial condition by building their credit history with on🙈-ti꧒me payments and responsible debt management of their mortgage loan. Over time, the borrower can build equity in the home and boost their credit score.

Of course, risk-based mortgage pricing that leads to excessive lending can backfire, as it did in the 澳洲幸运5官方开奖结果体彩网:subprime meltdown that led to the澳洲幸运5官方开奖结果体彩网: 2008 financial crisis. Subprime borrowers with poor credit were given mortgages, which, at some point, they were unable to make the payments and defaulted.

Risk-Based Mortgage Prici൲ng Expands Credit Options

Risk-based mortgage pricing has expanded🃏 the types of mortgages lenders can offer and has increased the number of borrowers that can generally qualify for a mortgage.

Alt-A and subprime mortgages, the types of mortgages generally subject to risk-based pricing, are frequently sold by the mortgage originator into the 澳洲幸运5官方开奖结果体彩网:secondary mortgage market, where they typically become part of 澳洲幸运5官方开奖结果体彩网:collateralized mortgage obligations (CMO𒐪s), 澳洲幸运5官方开奖结果体彩网:asset-backed securities (ABSs), and 澳洲幸运5官方开奖结果体彩网:collateralized debt obligations (C𒆙DOs).

Risk-based pricing plays a ꦦlarge part in the credit structuring of CMOs, ABSs, and CDOs, enhancing their overall credit rating and making them a🍃ttractive to a wide range of investors.

The Bottom Line

Risk-based mortgage pricing helps lenders protect themselves from default by charging higher interest rates to borrowers with poor credit history. To ensure a lower rate and more favorable loan terms, monitor and improve your credit history before applying for a m🔴ortgage loan.