Starting May 1, New Home Loan Fees Subsidizing Riskier Borrowers Will Be in Effect.

Homebuyers with good credit will soon have to pay higher mortgage fees to subsidize borrowers with lower credit scores as part of the Federal Housing Finance Agency’s quest for affordable housing.

On May 1, Fannie Mae and Freddie Mac will implement changes to loan-level pricing adjustments (LLPAs) fees. This will affect mortgages from commercial banks nationwide, from Wells Fargo to JPMorgan Chase.

The new rules will essentially adjust the interest rates that homebuyers pay. Purchase loans, restricted cash-out refinances, and cash-out refinance loans will all be impacted by this recent revision.

What are the new rules?

Under the new rules, borrowers with credit scores above 680 will receive loan fee increases to subsidize fee reductions for borrowers with lower credit scores.

For instance, a homebuyer with a 740 FICO credit score who pays a 15% to 20% down payment will pay a 1% surcharge — an increase of 0.75% from the previous surcharge of 0.250%.

Meanwhile, credit homebuyers with scores under 679 will have reduced surcharges. A borrower with a 620 FICO credit score and a down payment of 5% will get a fee reduction of 1.75%. After being absorbed into the long-term mortgage rate, this is around a 0.4% to 0.5% discount.

How much of an increase can high credit score borrowers face?

After all the rough calculations, the increase high credit score borrowers will face is around a quarter of a percentage point after being factored into a long-term mortgage rate. Experts calculate that the buyer could anticipate an increase of around $40 on a $400,000 loan with a 6% mortgage rate.

But Wait, There’s More

The revised price structure also adds a new fee for buyers whose debt-to-income ratios exceed 40%. After some opposition from the Mortgage Bankers Association and other businesses, the FHFA declared that it would postpone this new debt-to-income fee until at least August 1. According to the FHFA, this would give all lenders enough time to implement the fee.

Since low-income buyers tend to have higher DTIs, this 40% cap can make the fee changes intended to help high-risk borrowers less affordable than originally intended. Time will tell how this plays out.

How to Prepare

People preparing to be homeowners after May 1 should call their lender to figure out actionable next steps to optimize their loan rate and figure out how much to pay down to ensure the best possible mortgage payment. Take a good look at your debt-to-income ratio, credit score, and other financial stats, and create a plan that’s tailored to benefit your path to homeownership.

Big Picture: It Still Pays Off to Have a Good Credit Score.

With so much media buzzing about this topic, it’s wise to approach it with a cool head. The New York Times spells out the rules in more detail, acknowledging the regulations while arriving at the conclusion that hard work on your credit score and savings still pays off. While the rules are intended to make homeownership more accessible to people with lower credit scores and down payments, and they do get a relative break from fees, everything shakes out with the riskier borrower still paying more.

Specifically, for a house valued at $300,000, a person with good credit and 20% down have an increase of fees from $1,500 to $2,625, while a person with riskier credit and a lower down payment gets fees decreased from $10,500 to $5,250. In the end of the day, the person who saved more and has a better score still pays less fees. However, if you do have a lower credit score, you do catch a break compared to times before the rules were in effect. For more information on this, read the rest of this fantastic article by Tara Siegel.

The Bottom Line

In real estate, the rules are always changing and evolving. Marketplace Homes has been there through the housing crash of 2008 and when rates were higher than today’s. We’re still here, and we’re ready to help all our clients get their dream home. If you have any questions, our team of real estate agents and solutions experts will be glad to hop on a call and assist you with your home purchase plans.