What is risk-based pricing in mortgage lending?

Risk-based pricing in mortgage lending refers to the practice of charging different interest rates based on the borrower's credit risk. This means that lenders assess the likelihood that a borrower will default on their loan by examining factors such as their credit score, payment history, and overall financial situation. If a borrower is deemed to have a higher risk of default, they might be charged a higher interest rate to compensate for that risk. Conversely, a borrower with a lower risk profile could qualify for a lower interest rate.

This approach enables lenders to manage their overall financial exposure while also trying to ensure that loans are available to a broad range of borrowers, albeit at interest rates that reflect their individual risk levels. By aligning interest rates with the risk presented by different borrowers, lenders are better able to maintain profitability while offering funds to a diverse customer base.