I came across this article from Jack “the Mortgage Professor” Guttentag discussing the difference between wholesale and retail mortgage prices. 

Guttentag has formed an alliance of sorts with Amerisave, an online mortgage broker.  I read just about everything Guttentag has ever written before I got my first mortgage.  His writings convinced me to limit my search to Amerisave or another up-front mortgage lender that would guarantee their fees.  I ended up going with Amerisave.  I’m glad I did, despite a small mistake made by Amerisave that would have cost me $300.  After a few months of prodding and a quirky turn of events I finally got Amerisave to make good on the $300.  I’ll post about my Amerisave experience sometime soon.

Back to the article.  Now Guttentag has teamed up with Amerisave to provide wholesale mortgage price information on his website.  Without the Amerisave data on Guttentag’s site it is difficult for retail mortgage borrowers to obtain wholesale data.  By comparing wholesale data with the retail data quoted by brokers or lenders, the retail borrower gets an idea of the broker’s or lender’s markup.

The most interesting thing about the article is the data Guttentag gives about the average difference between mortgage rates for:

  • Conforming and non-conforming loans.  Before the so-called sub-prime crisis the difference was 0.278%.  A few months into the crisis it had risen to 0.745%.  That extra half percent for a non-conforming loan is a big deal for those of us in high-cost areas.  Note that Guttentag’s article was written before the new higher conforming loan amount was approved.  I would expect there would still be a difference, but it occurs at a different loan amount (up to $729,750 depending on where you live) rather than the previous limit of $417,000.
  • Full-doc and No-doc loans.  Difference was 0.525% before the sub-prime crisis and 1.022% after.  Ouch.
  • Good credit and not-as-good credit.  Before the sub-prime crisis a FICO score of 620 cost you 0.3% on your loan compared to a 720 score.  Five or so months into the crisis the lower credit score cost you 1.37%.  Ouch.  Even worse, loans were no longer offered to borrowers with 620 scores after the first five months.

The numbers show that bad credit is much more costly than getting a non-conforming loan or a no-doc loan.

What to do with this information?  First, figure out what is the new conforming loan amount for your area.  If your loan amount now qualifies whereas it didn’t before, you should watch rates to see if it makes sense to refinance.

Second, do a full-doc loan if you’re able.  For most people the only difference between getting a full-doc and a no-doc loan is convenience.  It takes a little more time and organization to get everything together for the full-doc loan.  Getting the no-doc loan is easier, but an extra half percent on your mortgage is a hefty price for convenience, especially if you have the mortgage for many years.

Finally, establish good credit.  If you don’t have much of a credit history, begin to establish one by getting a credit card.  If you have a bad credit history, make the decision to change your credit habits.  It will take time to build a good credit file and raise your score, but it will pay for itself many times over.