High Credit Borrowers Paying The Price?

Higher credit score borrowers getting penalized under new mortgage fee plan?

If you’re a borrower with a good credit score, it’s time to start crunching the numbers. Recently, news has spread of Fannie Mae and Freddie Mac, two of the largest mortgage insurers in the U.S., have a new mortgage fee that could increase the cost of your mortgage rate. A move some see as unfair and an attempt to penalize those who have managed their finances responsibly, this tax has far-reaching implications for borrowers with high and low credit. Discover what it means for you and how to navigate through these changes in order to get the best financing options in today’s market.

The biggest negative impact is on borrowers that have good, but not great credit scores between 700-760 that are looking at making down payments between 10-20%.

-Nick Gulick @homeric

What type of mortgage loans do these fees impact?

Under the new pricing adjustments, first-time home buyers and borrowers with lower credit scores are benefiting the most. The fee will impact loans backed or guaranteed by Fannie Mae or Freddie Mac, regardless of the lender. Fannie Mae’s and Freddie Mac’s share of the mortgage market comprised nearly 60% of all new mortgages during the pandemic, up from 42% in 2019, according to the Urban Institute. It impacts a majority of loans under the 2023 conforming loan limits of $726,200 for single family residence in the US. The biggest negative impact is on borrowers that have good, but not great credit scores between 700-760 that are looking at making down payments between 10-20%.

What’s changing with credit scores and mortgage rates?

As the lending landscape continues to evolve, the gap between what a high credit borrower pays and what a low credit borrower pays for a mortgage is getting tighter. If you have a high credit score, you’ll still pay less than if you have a low credit score. However, the penalty now for having a lower credit score will be smaller than it was before May 1. For example, if you have a score of 659 and are borrowing 75% of the home’s value, you’ll pay a fee equal to 1.5% of the loan balance.  Before these changes, you would have paid a 2.75% fee.  On a hypothetical $300,000 loan, that’s a difference of $3,750 in closing costs. On the other end, if you have a credit score of 740 or higher, you would have paid a 0.25% fee on a loan for 75% of your home value before May 1. After that date, you could pay as much as 0.375%. Take a look at how the changes compare to previous pricing and fees as well as the overall impact in the charts below. You can see what credit score and down payment will get you a better rate. RED = rising costs, GREEN = falling costs

Purchasing LLPA’s Impact by Homeric Mortgage
Refinancing LLPA’s Impact by Homeric Mortgage

The gap between what a low credit borrower pays and a high credit borrower is getting reduced.

– Nick Gulick @Homeric

Will there be any more changes?

FHFA also plans a fee on August 1 for borrowers with at least a 40% debt-to-income (DTI) ratio and 60% loan-to-value ratio, calculated by how large your loan is compared with the value of your home. This fee was also supposed to take effect May 1 but was delayed after pushback from the industry.

How your mortgage rates will be impacted by your credit score and down payment?

Your mortgage rate is directly impacted by both your credit score and loan-to-value (LTV) ratio. Fannie Mae and Freddie Mac loans are popular because they offer competitive interest rates and flexible guidelines when it comes to credit scores and LTV. However, the fee gap on the loan level between what a low credit borrower pays vs high credit borrower is getting reduced. Most borrowers never see the loan level pricing adjustments so it will show up in the form of higher rates and fees in the form of discount points. Generally, with Fannie Mae and Freddie Mac, you need a minimum credit score of 620 and LTV of 80% to qualify for a mortgage loan. With a high credit score of 760 or above and an LTV of 80%, you may get the lowest possible mortgage rate, but if your credit score is below 620 and the LTV is above 80%, you may have to pay a higher rate. Make sure to research the current market rates, compare offers, understand the difference in rate and fee options and stay on top of your credit score to get the best home financing options.

What are mortgage rates today?

If you want to see what live rates are right now that you can personalize for your financing variables, check out our interactive rate tables. Homeric always makes it easy to see what mortgage rates are at any time. See what you could qualify for with live rates and a quick and easy way to get self qualified right now.

Putting less money down or simple credit improvements can save a lot of money.

– Nick Gulick @homeric

Client checking financing options with putting less money down or simple credit improvements to save a lot of money.

Understanding creative solutions and lower mortgage rates options

These changes could have a direct impact on mortgage rates for those looking to purchase or refinance a home. It's important to work with a lender that understands how these new changes impact you and your financing options. A 20% downpayment may no longer give you access to lower rates and financing options. Your lender should be able to provide guidance on mortgage rates pricing breaks for your particular credit score as well as offer creative financing solutions when looking for home financing options. We have helped clients put less money down and then offer the ability to recast their current balance and lower payments as one creative way to save money. Other borrowers have been able to increase their credit scores by 100+ points to save additional money. Overall the change amounts to a tweak of an existing fee structure in favor of those with lower credit scores and at the expense of those with higher credit scores, but there's no scenario where someone with lower credit will have a lower fee. In other words, don't go skipping those car payments in the hopes of getting a lower rate.