Think you can cash in on advertised mortgage rates? Think you can finance as much of a home purchase as you want? Forget about it.

A mortgage "niche" decides what rate you'll get, and for that matter, how much you can finance, and you'd better get to know your niche, according to Jack Guttentag, a former professor at the University of Pennsylvania's Wharton School.

Lenders vary the terms they offer you based on a large number of loan, borrower and property characteristics that affects their risk and cost of the loan.

That's why the interest rate or points quoted over the phone and what you see in the newspaper are often lower than the interest rate or points quoted when you actually apply for a home mortgage. It's also why you'll discover you can borrow only 70 or 80 percent of the value of the property, rather than the ballyhooed 90 or 95 percent expected.

Perhaps you are an immigrant. You could be a co-borrower who won't actually live in the house. Maybe you'll also finance a second mortgage. Your new home could be a condo with more than four stories. And say you don't want your taxes and insurance premiums collected in an escrow account.

What you see advertised isn't what you'll get, because chances are, you don't have the pristine requirements necessary for that perfect loan, says Guttentag, also a former division chief at New York's Federal Reserve Bank.

Guttentag has come up with 29 "niche factors" -- borrower, property and transaction characteristics that lenders may use to adjust up the rate, points, or loan size.

"The term used more frequently is 'customized,' but there just is no such thing as one generic mortgage. Every borrower is different, every mortgage is different," said Alison Berkley Wagonfeld, director of marketing with Palo Alto-CA based Intuit's QuickenMortgage, which uses niche-digging software and technology designed by Guttentag's GHR Systems, Inc.

While the exact amount will vary from lender to lender, you will pay more and borrow less depending upon your niche factors and how many of them you have in the five categories.

Niches, niches, and more niches

In each category, here are a some examples of niche factors Guttentag says are likely to affect the cost of your loan.

• Transaction: Loan amount; lock-in period.
• Property: Co-ops; planned unit developments; manufactured homes.
• Loan purpose: Refinance; investment home; vacation home.
• Documentation: Self-employed; streamlined refinance.
• Special characteristics: Co-borrower; non-US citizen.

Guttentag's software allows lenders to enter up to 40 million prices in a single loan program.

"This is one reason it's hard to get the whole mortgage process on line and make it completely electronic. It is so exhaustive. What most companies do on the Web is ask only a few questions and pray they other stuff comes in later," says Warren Myer, CEO of BestRate.com, Inc. in San Jose, CA.

"Mortgage companies are not deliberately trying to do this and there are a lot of people in the food chain: the broker, the lender, the title company, the PMI company and everybody has their own requirements," Myer said.

Know thy niche

So you can determine where you can get the best rate, it behooves you to know your niche.

One lender offering the loans in one niche, may not offer them in another. Guttentag surveyed 15 national lenders and found that while all 15 made investor loans on 30-year fixed-rate mortgages, only nine of them made investor loans to borrowers who were doing a cash-out refinance, four were also willing to waive standard loan documentation requirements and only two handled "ARMs," adjustable rate mortgages.

Also, a lender offering the best deal in one niche is not likely to have the best deal in another niche. In another Guttentag study of 13 lenders operating in 19 niches, 12 of them offered the best deal in at least one niche, but none of them offered the best deal in more than three niches.

"Nichification" is a major reason mortgage brokers have become major players in the mortgage market, says Guttentag, because they can help you sift through mortgage programs and find the best loan in your niche.

"Since mortgage brokers deal with multiple lenders, usually 30 or more, they are well positioned -- as consumers are not -- to identify the lenders who operate in a particular niche, and select the best of the available deals," Guttentag says.

Consumers can do their own homework on multi-lender mortgage Web sites, such as Quicken, E-Loan, Home Advisor, and iOwn.com --formerly HomeShark, which can help you find your own niche.

Published: June 4, 1999

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