How a Mortgage Loan Gets Priced

If you’ve ever discussed mortgage payments with your neighbors, you’ve likely discovered price variations – even if you all live in nearly identical homes. While down payment amounts, interest rates, and loan product choices play a big part in these differences, loan prices can vary significantly for the same type of loan. How do lenders determine the price?

Lenders use loan pricing matrixes or loan pricing software to come up with the ultimate price. These tools are based on the lender’s formal loan pricing policy which spells out the specific criteria and risk levels the institution will accept in order to meet its capital and earnings requirements. Loan pricing software is often used to calculate loan prices based on the lender’s requirements, the borrower’s creditworthiness, and cost of funds along with various options such as prepayment penalty waivers, points, and interest rate caps.

When a lender uses loan pricing software, the loan details (such as loan type, length of loan, amount of loan, down payment amount, interest rate, and so on) can quickly be entered and a price returned. However, that’s just the beginning of the story. Borrowers are not created equal. Therefore, the lender must consider your ability to pay which requires additional information such as credit score, credit history, income, long-term employment prospects, and debt which all factor into your mortgage or loan risk analysis. These values are also entered into the software and compared against the lender’s pre-established criteria and pricing guidelines. The software then returns a price for the loan.

When a lender does not use loan pricing software, the same basic process occurs, but it’s more time consuming. They often use matrixes to quickly give prospective borrowers ballpark figures.

In addition to speed and accuracy, loan pricing software enables the lender to try different scenarios or compare various loan products to find the most appropriate loan product for the borrower.

As you can see there a number of different factors that can contribute to the price of a loan. The best strategy when getting you are about to take out a loan is to shop around. By doing your homework and looking at a number of different options you can put yourself in the best position to not be in financial trouble years after you get your loan. Being responsible with your finances is a part of life and one of the most important factors that can affect your quality of life. So do your homework and be smart about your financial decisions. (Source:

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