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Are High-Credit Homebuyers Being Forced to Subsidize Low-Credit Homebuyers?

New mortgage pricing policy has homebuyers with high credit scores paying more in fees.

A new policy for mortgage borrowers from U.S.-government-backed institutions, Fannie Mae and Freddie Mac, took effect Mon. May 1, 2023.

What’s being called by some on the right as the ‘middle-class tax hike’ is actually changes to the Federal Housing Finance Agency (FHFA) loan level pricing adjustment (LLPA) fees.

What are LLPAs

LLPAs, which are upfront fees, take into account a borrower’s credit score and down payment amount. The fees are usually translated into percentage points that affect the buyer’s mortgage rate and charged by Fannie Mae and Freddie Mac on conventional conforming mortgages. These two government-sponsored enterprises buy about two-thirds of the mortgages originated by U.S. lenders.

New Pricing Policy

In an effort to provide equitable access to homeownership:

  • Homebuyers with good credit scores ranging from 680 to above 780 will see a spike in their mortgage costs – with applicants who place 15% to 20% down payment experiencing the biggest increase in fees.
  • Homebuyers with average to lows credit scores 679 or lower will experience a reduction in their fees, leading to more favorable mortgage rates.
  • Homebuyers who put 15% to 20% down on a home could feel the biggest increases.

Key Criticism to New Policy

Critics believe FHFA’s loan level pricing adjustments impose excessive charges on borrowers with good credit scores in order to offer reduced mortgage rates to borrowers with less favorable credit scores, essentially making homeownership more difficult for good-credit borrowers while making it easier for poor-credit borrowers.

And the critics may have a good argument for their position, for example:

  • Homebuyers with a 740 FICO credit score and a 15% to 20% down payment had a fee of 0.25% under the previous pricing. But with the current pricing changes the fee is now 1.00%, that’s a 75-basis-point higher fee.
  • Homebuyers with 620 FICO credit score and a 5% or less down payment had a fee of 3.50% under the previous pricing. But with the current pricing changes the fee is now 1.75% that’s a 175-basis-point lower fee.

No changes to some categories of the program

The following categories of loans will continue to have no upfront fees at all:

  • First-time home buyers at or below 100% of area median income (AMI) in most of the United States and below 120% of AMI in high-cost areas
  • HomeReady and Home Possible loans (Fannie and Freddie’s flagship affordable mortgage programs)
  • HFA Advantage and HFA Preferred loans (Housing Finance Agency programs)
  • Single-family loans supporting the Duty to Serve program

Does having low credit scores help homebuyers

Contrary to what may be perceived, your credit score remains the primary factor affecting your mortgage rate. The recent fee changes imply that certain borrowers with high credit scores may receive less benefit than they did before.

Nevertheless, borrowers with high credit scores still receive the lowest fees on the updated pricing fees.

Take note that homebuyers with credit scores above 780 and who make a 25 percent down payment will not be charged any fees, making good credit scores the goal in your overall financial outlook.

After much backlash, Sandra Thompson, director of the Federal Housing Finance Agency (FHFA), defended the changes by stating ““​Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less..The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”

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