I was Rocking it in the Rockies this week with the Colorado Mortgage Lenders Association. These people are serious about getting this right! One tool that I used to help them solidify the concept is the very basic math example below. With the new release this weekend, our technology will do this for you, but just in case here it is!
Step One: Determine APOR
APOR 3.25 Assume $100,000 Loan Amount
Market Price to Company (What Secondary Prices to)
Step 2 Pricing Adjustments Build into the rate
FICO Adjustment .50bps
DTI Adjustment .50bps
LTV Adjustment .50bps
Total Pricing Adjustments = 150 bps
Start Rate or Adjusted Rate = 4.375 which is displayed to LO as Par.
Test # 1 How Many “Bona Fide” Discount Points Can be Used?
APOR + 1%
3.25% + 1% = 4.25%
The Start Rate exceeds 4.25%, therefore the client can only use 100bps bona fide discount.
If risk adjustments were only 100bps then your client rate would be 4.25% and then you could use up to 200bps bona fide discount.
Now, calculate your Finance Charges.
For the example let’s assume $3000
Calculate your APR
For the example let’s assume the APR is 4.50% and the loan is a conventional loan.
Let’s also assume that the APR on an FHA is 4.875%
Test #2 Higher Priced Mortgage Loan
APOR + 1.5% = (if APR is equal to or Less, then you do not have a higher priced mortgage loan)
The conventional loan would pass 3.25% + 1.5% = 4.75%
3.25% + 1.50% = 4.75% Conventional APR = 4.50%
The FHA loan would not pass and would be considered a “higher priced mortgage loan”
3.25% + 1.50% = 4.75% FHA APR is 4.875%
Test #3 Points and Fees Test
Subtract the finance charges from your loan amount to get the “amount financed.
$100,000 – $3000 = $97,000 (amount financed)
Determine your Points and Fees
Take 3% of the Amount Financed which is $2910
If your points and fees are equal to or less then loan passes
If your points and fees are more then you loan does not pass
What if Pricing Is Not Par?
Over= Credit to Client or Add to Points and Fees
Under = Client to pay or take next available rate (which as you can guess will result in a lender credit or will dump into the points and fees.
Secondary Marketing Methodology
•Must prove it through consistency! When it varies you have pricing disparity!
•Create a checklist for you Finance Charges and Points & Fees.
•Decide what fees will be baked into the rate and which will not.
•Configure their calculation in your pricing engine.