Some changes are coming to Mortgages This month can reduce fees for new homebuyers with low credit scores.
Starting May 1, upfront fees on loans backed by Fannie Mae and Freddie Mac will be revised based on a “redesigned and recalibrated” framework, according to the Federal Housing Finance Agency. The changes are intended to help mitigate the risks of loans taken out by the two government-sponsored companies.
These fees, also known as loan-level rate adjustments, are based on multiple factors, including credit score and down payment amount.
The changes could result in lower fees for homebuyers with credit scores below 700. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat, the FHFA says, although some may see an increase.
In general, borrowers with higher credit scores will still pay less. But the changes could mean a lower penalty for people with a low credit score.
What does this mean for new homebuyers?
Those looking for a mortgage after May 1st will have to consider these fee changes because they can mean the difference in hundreds if not thousands of dollars.
For example, a borrower with a credit score of 760 and put a 5% down payment must pay a Loan Level Rate Adjustment, or LLPA, of 0.5% under the new changes, which is half of what the fee was. before the first of May. On a $250,000 loan, that’s the equivalent of a $1,250 savings.
On the other hand, a borrower with the same down payment and a credit score of 680 will see their fees go from 2.75% to 1.625%, which means a savings of $2,812.
In many cases, borrowers will save money on fees except for those with scores above 740 and with a down payment in the range of 10%-20%. These homebuyers could see a jump in fees from 0.125% to an additional 0.5% marked.
You can see the tables outlining the new graphic framework for Freddie Mac and Fannie Mae.
Borrowers will need to weigh these factors when obtaining a mortgage. They should also consider speaking with the home seller to negotiate a price to factor in fees or see if other loan options are available through their bank.
Why do things change?
Sandra Thompson, director of the FHFA, issued a statement on April 25 due to concerns that those with higher credit scores are being hit with higher fees to compensate those borrowers with lower scores.
“Higher credit rating borrowers are not charged so that lower credit rating borrowers can pay less,” Thompson said. “Updated fees, as was true of previous fees, generally increase as credit scores decrease for any given level of down payment.”
It says, “The pricing framework will enhance safety and soundness, better ensure institutions (Fannie Mae and Freddie Mac) fulfill their statutory mandates, and align pricing more accurately with expected financial performance and underlying loan risks.”
LLPAs were first implemented in April 2008 due to the housing market crash, with the idea that these fees would help mitigate the risks Fannie Mae and Freddie Mac would take on.