Some changes are coming to mortgages this month that could decrease fees for new homebuyers with low credit scores.
Starting May 1, upfront fees on loans backed by Fannie Mae and Freddie Mac will be adjusted based on a “redesigned and recalibrated” framework, according to the Federal Housing Finance Agency. The changes are meant to help mitigate the risk of the loans taken on by the two government-sponsored enterprises.
These fees, also known as loan-level price adjustments, are based on multiple factors, including credit score and down payment amount.
The changes could result in lower fees for homebuyers who have credit scores under 700. The FHFA says many borrowers with high credit scores or large down payments will see their fees decrease or remain flat, though some may see an increase.
Overall, borrowers with higher credit scores will still pay less. But the changes could mean less of a penalty for people who have a low credit score.
What does this mean for new homebuyers?
Those looking for a mortgage after May 1 will have to take into account these fee changes as it could mean the difference between hundreds if not thousands of dollars.
For example, a borrower who has a credit score of 760 and put 5% as a down payment will have to pay a loan-level price adjustment, or LLPA, of 0.5% under the new changes, which is half of what the fee was before May 1. On a $250,000 loan, this equates to a savings of $1,250.
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 with the exception being for those who have scores above 740 and with a down payment in the range of 10%-20%. These homebuyers could see a jump in fees from as little as 0.125% to as much as an extra 0.5% tagged on.
You can see tables outlining the new fee framework for Freddie Mac and Fannie Mae.
Borrowers will need to weigh these factors when taking out a mortgage. They should also consider talking with the seller of the home to negotiate on the price to factor in the fees or see if other loan options are available via their bank.
Why are things changing?
Sandra Thompson, director of the FHFA, released a statement on April 25 over concerns that those with higher credit scores were being hit with higher fees to offset those borrowers with lower scores.
“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” Thompson said. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
She says, “Pricing framework will bolster safety and soundness, better ensure the enterprises [Fannie Mae and Freddie Mac] fulfill their statutory missions, and more accurately align pricing with the expected financial performance and risks of the underlying loans.”
LLPAs were first implemented in April 2008 due to the housing market crash, with the idea being that these fees would help mitigate risk that Fannie Mae and Freddie Mac would be taking on.
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