Risk Based Pricing

The system used to determine pre-qualification of applications which also serves as the basis for the adjustment of offered interest rates by mortgage companies and other financial service entities is called risk-based pricing. The goal of the process is to mitigate the potential for losses incurred by passing on higher fees to higher risk customers.

Elements taken into account in the pricing model include the applicant's credit history and current income, other assets held by the applicant, the perception of risk associated with the property itself, the worth of any collateral presented, property type, proposed property use, and the location of the property.

By factoring in some or all of these elements the lending agency determines the rate of interest to be associated with the loan in question and the suitability of the applicant to take on a debt obligation. Essentially then, risk=based pricing is a method of self protection on the part of the lender intended to identify and to charge poor credit risks accordingly.

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