Fees on mortgages backed by Freddie Mac and Fannie Mae are set to change next month, in a plan designed to make homeownership more affordable for more people. Broadly, the fees will go down for many with lower credit scores and will increase for many with higher credit scores.
Does that mean the people with lower credit scores will pay the same as those with higher credit scores? No! Those with higher credit scores will still pay less based on lower risk to the lenders, but having a lower credit score will now come with less of a penalty.
Many variables come into play with the cost of a home loan, including what kind of property you are buying, how much money you’re putting down and how high or low your credit score is. These variables help lenders and government-backed Fannie-Mae and Freddie-Mac – which buy the vast majority of loans from lenders – price loans for risk..
These pricing hits, called loan level price adjustments (LLPA), have been around for a while and are occasionally updated. These adjustments allow Fannie and Freddie to keep from being undercapitalized and over-exposed to risk. Fannie and Freddie, which guarantee roughly half of the country’s mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors.
Changes to existing fee structure
In October, the Federal Housing Finance Agency (FHFA) Announced it would eliminate upfront fees for certain borrowers and affordable mortgage products, who tend to be borrowers with limited wealth or income, while putting in place increases to other fees, specifically for most cash-out refinance loans.
Then, in January, the FHFA announced additional updates to the fee structure for single-family homes that made permanent the eliminated fees and spelled out how other fees would be increased.
“These changes to upfront fees will strengthen the safety and soundness of the enterprises by enhancing their ability to improve their capital position over time,” Sandra L. Thompson, director of FHFA said at the time. “By locking in the upfront fee eliminations announced last October, FHFA is taking another step to ensure that the enterprises advance their mission of facilitating equitable and sustainable access to homeownership.”
How the fee changes affect you as a consumer.
For those with lower credit scores, the changes will reduce the penalty for having a low score. For those with higher credit scores, in certain cases, fees may increase.
For example, a buyer who made a 20% down payment with a credit score of 640 would see their fee drop 0.75% from 3% to 2.25%. Another buyer, also making a 20% down payment, who has a credit score of 740, would see their fee climb by 0.375%, from 0.5% to 0.875%.
In another example, a buyer with a 640 credit score and an 80% loan-to-value ratio will have a fee of 2.25%, while a buyer with a 740 score will have a fee of 0.875%. The difference? – About $4,000 more for a buyer with a 640 credit score than for a buyer with a 740 credit score, based on a $300,000 mortgage.
The table outlining the fees based on loan to value ratio and credit score have been posted by Freddie Mac and Fannie Mae.
Some critics of the move argue that well-qualified buyers are already struggling to enter the housing market, and that although providing access to credit to lower-income borrowers with lower credit scores and down payments is an important initiative to help expand the demographic, that , doing so at the expense of other consumers who are already struggling to enter the market is a mistake
But that criticism may be misplaced because the fee increases are targeted primarily on vacation homes and high-value loans, not exactly the type purchases that need the greatest relief. Furthermore, any loan with less than a 20% down payment must have private mortgage insurance, so those who put down less than 20% pose less risk and burden the GSE’s and therefore, lower fees are actually warranted to this type of buyer.
All in all, these reductions and lower payments is good news for consumers during a time when affordability is desperately needed.
