As consumers head to mortgage offices to take advantage of some of the best interest rates in a generation, they may find a new wrinkle in the home financing process.

How good a deal they get on their new or refinanced home loans may depend heavily on how good their credit is.

It's called "risk-based pricing," and it means that the borrowers with the best credit will get the lowest finance costs. Buyers and refinancers with a blemish or two on their credit reports will still get loans -- but maybe at a percentage point or two higher than the guy next door with spotless credit.

"If you qualify for an A loan, you will get one rate -- a very good rate -- and if you qualify for an A- or a B loan, you will pay a little more," says Leland Brendsel, chairman of the Federal Home Loan Mortgage Corp., or Freddie Mac, one of the country's largest sources of home finance money. "You find this same thing in other parts of the consumer finance like auto lending and credit cards."

Using sophisticated computer programs that score borrowers' credit based on payment history, job security, and other factors, Freddie Mac and other lenders are beginning to separate mortgage applicants into different grades and charge accordingly.

"The rate the borrower expects is pretty well known -- they've shopped around," says Brendsel, who was in Dallas last weekend for the National Association of Home Builders show. "The actual rate that will be charged will not be known until that borrower's application has been underwritten."

Traditionally, conventional lenders such as Freddie Mac have underwritten home loans on a pass-fail system.

Along with providing home financing for a wider range of borrowers, mortgage industry lenders say, risk-based programs will save many consumers money.

"If you didn't qualify for a conventional mortgage, the lender has not been willing to make the loan, and you have had to go down the street," Brendsel says. "The rates charged these types of borrowers by finance companies has been excessive in many cases."

On the flip side, some consumer advocates and other mortgage industry officials worry that risk-based lending will price some marginal borrowers out of the home finance business.

"True, this is the cutting edge, but that edge can be very sharp for some buyers," says Nick Retsinas, an officer with the Federal Housing Administration.

Mortgage industry executives say 1998 is already shaping up to be a near record year for home loans.

With long-term mortgage costs just under 7 percent, an all-time high volume of home loan applications were received by lenders last week.

"The environment in which we are doing business today is better than it gets," says Jim Johnson, chief executive of Fannie Mae, the nation's largest source of home loan money. "It's a great time for both consumers and lenders."

If mortgage rates stay near their current levels, lenders predict that home loan volumes this year could approach the record $1 trillion in mortgages made in 1993.

Brendsel predicts about $950 billion in mortgages will be made this year.

"And it could run up over that," he says. "The loan applications have already picked up dramatically."

The industry estimates that more than 250,000 customers flooded into mortgage offices last week seeking to refinance or purchase homes.

Published: January 21, 1998

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