Risk-Based Mortgage Pricing

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DEFINITION

Mortgage lenders' offers of different interest rates and loan terms to different borrowers based on a grading of the credit worthiness of each borrower. Lenders grade borrowers, and offer different rates and terms to borrowers, based on several criteria including the borrower's credit score, payment history and the loan to value (LTV) ratio of the mortgage. Risk-based pricing is commonly used by Alt-A and subprime lenders.

INVESTOPEDIA EXPLAINS

Risk-based mortgage pricing has expanded the types of mortgages lenders offer and increased the number of borrowers that can generally qualify for a mortgage. Alt-A and subprime mortgages, the types of mortgages generally subject to risk-based pricing, are frequently sold by the mortgage originator into the secondary mortgage market, where they typically become part of collateralized mortgage obligations (CMO), asset backed securities (ABS) and collateralized debt obligations (CDO). Risk-based pricing plays a large part in the structuring of CMO, ABS and CDO, enhancing their overall credit rating and making them attractive to wide range of investors.


RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments are organized ...
  2. Mortgage

    A debt instrument, secured by the collateral of specified real estate property, ...
  3. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans and other assets. ...
  4. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against assets other ...
  5. Subprime Mortgage

    A type of mortgage that is normally made out to borrowers with lower credit ...
  6. Alt-A

    A classification of mortgages where the risk profile falls between prime and ...
  7. Mortgage Originator

    An institution or individual that works with a borrower to complete a mortgage ...
  8. A-Credit

    The highest credit grade available as assigned to a borrower by a lender. Lenders ...
  9. Forbearance

    A temporary postponement of mortgage payments.
  10. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes the monthly loan ...
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