Generally speaking, when it comes to a conventional mortgage, a given bank offers loans at the same interest rate for everyone. As long as your qualifications allow you to pass a certain threshold to qualify for the mortgage, you pay the same interest as everyone else who surpasses that threshold and obtains the same loan at the same time as you.

This means that someone with, say, an OK but not amazing credit score will pay the same interest as someone with a superlative score and credit history, as long as they both meet the requirements to qualify for the loan.

I'm curious about whether there is a specific reason why banks do this. Couldn't they instead tailor interest rates based on applicants' specific and individual qualifications, so that people who are extremely low risk pay lower interest than people who have good but not excellent credit, or have bad debt-to-asset ratios?

I realize that different banks offer different rates for the same mortgage, and that rates fluctuate all the time. I'm not suggesting that everyone who qualifies for a mortgage pays the same interest rate; they obviously don't. I'm instead interested in understanding why, if two people apply for a mortgage at the same bank at the same time and both are approved, they each pay the same interest rate even though one applicant might be higher risk than the other.

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    Your premise is flawed, the rate people qualify for is affected by their perceived creditworthiness. – Hart CO Jan 17 '19 at 0:06
  • @HartCO Can you quantify that? How much of a difference is there, and for how much a difference in creditworthiness? – Acccumulation Jan 17 '19 at 0:34
  • @HartCO whenever I've applied for a loan I've asked the banks if they can do a better rate, and their answer is always "this is our rate today for that loan." Obviously creditworthiness plays a huge role in which loans you can qualify for; people with bad credit can only get loans with onerous terms. But in my experience everyone who can qualify for e.g., a 30-year fixed-rate loan gets the same rate from the same bank. – painter48179 Jan 17 '19 at 1:08
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    Back when my mortgages totalled over a million dollars, I had banks competing with each other to get my business. The idea that there's a given rate on a given day for a particular loan just isn't true. – Rupert Morrish Jan 17 '19 at 1:11
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    @Acccumulation This calculator is based on research that's a little dated, but likely not too different from now: myfico.com/credit-education/calculators/loan-savings-calculator – Hart CO Jan 17 '19 at 2:09

I am unsure of why you would be down voted but the premise of your question is correct. People with marginal credit scores often receive similar, and in some cases better, rates then those with high scores on substantial loans. How can that be?

Warren Buffet talks about seeking companies that ignore the "institutional imperative". This is defined as "the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so". In my mind credit scores are like that. There is plenty of marketing and many have bought into seeking a high credit score. The reality is that a credit score is mostly meaningless and mostly serves consumer lenders. Somehow they have convinced a large portion of the public to do their work for them for free.

When borrowing for things of substance the ability to pay eclipses credit score. As you state a borrower, who shows a good history of earning 10K/month and 20% down will probably receive a better rate then a borrower earning 4K/month and only 3% down for the same house. This is regardless of credit score. Banks know that a person can hack their scores by borrowing only small amounts and take that into consideration when lending for things like mortgages or business loans.

Sure a good credit score will save you money at the car dealership, however, if you were really interested in being financially efficient, you probably would not be borrowing to buy a car in the first place.

So that is your answer. It is all about the ability to pay with the mortgage.

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  • Along these lines, I always applaud bank robbers who do not hurt the customers or tellers. After all, "turn around is fair play". – Pete B. Jan 17 '19 at 15:15
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    “What is the robbing of a bank compared to the founding of a bank?” (Mac The Knife / Bertolt Brecht) – gnasher729 Jan 19 '19 at 12:15

It is understood by economists and historians that the existence of the mortgage GSEs (Fannie Mae/Freddie Mac) in the United States have lowered the interest rates paid by consumers since they were founded. There are a variety of factors that go into this, but commodification to allow for a secondary market is part of it.

It's worth noting that the loans banks can't sell on (jumbo loans as mentioned in comments, commercial loans, certain subprime loans) will have more negotiable rates, including on credit score to your point, but overall, the rates will probably tend to be higher than the uniform conforming loan.

For a loan that is sold on to a consolidator who writes a mortgaged backed security, I don't know if there are any incentives to the originating bank to charge slightly more interest based on credit risk, versus writing the loan at the prevailing rate as long as the credit score is over the underwriting minimum. It's possible this is an agent-incentive problem waiting to be solved.

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