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The gap in mortgage rates among lenders is larger than previously thought

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A deep dive into the recently expanded set of data that mortgage lenders must provide to regulators confirms that finding the best rate pays off, especially for borrowers looking for big loans, FHA or VA loans.

Researchers at the Consumer Financial Protection Bureau found that across all types of loans, the difference in annual percentage rate (APR) among top lenders tends to hover around half a percentage point. This means that a homebuyer who takes out a $300,000 loan at 7% instead of 6.5% could end up overpaying $1,200 a year.

But there was even greater price variation among the largest lenders offering state-backed FHA and VA loans.

After adjusting for factors such as credit score and combined loan-to-value (LTV), the rate differential between the top 20 FHA lenders was 61 basis points. At 64 basis points, the rate spread among the top virtual asset lenders was the widest of any.

One basis point equals one hundredth of a percentage point, so a 64 basis point spread means that if the lowest offered rate was 6.5 percent, the highest offered would be 7.14 percent.

The spread of mortgage prices by type of loan

The discrepancy in APRs (APR) offered in 2021 by the top 20 lenders in each loan category. Source: Consumer Financial Protection Bureau.

The spread among the top 20 lenders offering conventional mortgages eligible for purchase or a guarantee from Fannie Mae or Freddie Mac was much smaller at about 41 basis points.

At 57 basis points, the price spread among the top 20 providers of large loans over Fannie and Freddie’s credit limits was nearly as wide as FHA and VA loans.

Expanded HMDA reporting gives new information

Past research has also emphasized the importance of shopping at the best price. In February, researchers at Freddie Mac found that the spread in rates offered by lenders had doubled in the past year.

But CFPB researchers Aleksey Alexandrov and Elizabeth Saunders were able to unearth even more detail in their analysis of data from the 2021 Residential Mortgage Disclosure Act. Prior to 2019, lenders didn’t have to report the annual interest rate, or APR — a calculation that takes into account not just the interest rate, but the lender’s points, fees, and other fees — on the vast majority of mortgages.

Today, lenders must report not only their annual interest rate, but also their credit score, combined LTV and debt-to-income (DTI), “making it easier to compare loans on an apples-to-apples basis for all lenders,” the researchers said in a report on their conclusions.

Some lenders may charge higher rates to higher risk borrowers. But Aleksandrov and Saunders said they control many of the traditional risk indicators. They also excluded borrowers with a credit score below 640 or a debt-to-income ratio of more than 43 percent “for precisely these reasons.”

While their analysis shows greater price disparity among lenders offering FHA, VA, and jumbo mortgages, it does not explain why this is the case. But Alexandrov and Saunders acknowledge that even when consumers shop around, they can’t always choose the cheapest lender.

“Lenders are no longer the same,” write the CFPB researchers. “Some retain the service, some promote themselves with the speed and ease of closing transactions, and some have physical branches close to consumers.”

For some borrowers, “it is possible that these factors may outweigh the difference in price—just as in retail, a consumer may want to shop at a nearby store, or the cleanest store, or a store that offers the same product for less, even if there are no other goods. desirable qualities.

According to a recent analysis by Fannie Mae of eight years of consumer survey data, about a third of potential homebuyers receive an offer from only one lender, and this figure hardly changes over time.

The credit bureau won’t affect your credit score if you shop at rates over a set period of 30-45 days, and many mortgage comparison sites promise to help make finding the best rate easier.

But the CFPB warned operators of such sites in February that they could be breaking the law if they are paid to refer consumers to a particular lender “instead of basing their rating on neutral criteria such as interest rates and fees charged by the lender. “.

By finding the right lender, the CFPB also tells borrowers that they can save extra money by comparing the costs of obtaining title insurance and settlement services.

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