Washington, DC (CNN) Fees for mortgages backed by Freddie Mac and Fannie Mae are set to change next month, in a plan designed to make homeownership affordable for more people. In general the fees will decrease for many with lower credit scores and increase for many with higher credit scores.
But this does not mean that people with lower credit scores will pay less than those with higher credit scores. The changes mean that people with higher credit scores will still pay less based on the lenders lower risk, but having a lower credit score will now come with a lower penalty.
There are many variables that go into the cost of a home loan, including the type of property you buy, how much money you put in, and how high or low your credit score is.
These variables help lenders — and the government-backed Freddie and Fanny, who buy the vast majority of loans from lenders — price loans against risk. After starting with the base or rate rate, additional rate adjustments are added in order to calculate how risky the loan is for lenders.
Pricing results like this are called Loan Level Price Adjustment, or LLPA, and they’ve been around for a while and are updated every now and then. The price adjustments allow Freddy and Fanny to get away from undercapitalization and excessive exposure to risk. Fannie and Freddie, which underwrite nearly half of the nation’s mortgages, does not issue mortgages directly to borrowers, but instead buys mortgages from lenders and repackages them for investors.
Changes to the current fee structure
Last year, the Federal Housing Finance Agency, which oversees Freddie and Fannie, Fee increase On loans for which there is no less reason for government support, including some high-balance loans, vacation homes, and investment properties.
In October, FHFA announce It would eliminate upfront fees for some affordable borrowers and mortgage products, who tend to borrow from those with limited wealth or income, while imposing increases on other fees, especially for most cash refinancing loans.
Then, in January, FHFA announce Additional updates to the fee structure for single-family homes that have made the canceled fees permanent and explain how other fees can increase.
“These changes to upfront fees will enhance the safety and soundness of companies by enhancing their ability to improve their capital position over time,” FHFA director Sandra L. Thompson said at the time. “By securing the upfront fee waivers announced last October, FHFA is taking another step to ensure businesses deliver on their mission of facilitating fair and sustainable access to home ownership.”
How does a fee change work?
For those with low credit scores, fee changes will reduce the penalty for having a low score. For those with higher credit scores, more price levels are set, which in some cases may result in higher fees.
For example, a buyer who made a 20% down payment with a credit score of 640 might see their fees drop 0.75% from 3% to 2.25% with updates. Another buyer, who also made a 20% down payment and has a credit score of 740, would see his fees rise 0.375%, from 0.5% to 0.875%.
The fees will still cost the homebuyer a lower credit score.
A buyer with a 640 credit score and an 80% loan-to-value ratio will receive a fee of 2.25%, while a buyer with a 740 will receive a fee of 0.875%. The difference in estimated fees is about $4,000 for a buyer with a credit score of 640 compared to a buyer with a credit score of 740, based on a $300,000 mortgage.
The schedule that determines fees based on the loan-to-value ratio and credit score has been carried over Freddie Mac And Fannie Mae.
Some critics say eligible buyers are already struggling to enter the housing market.
“Between tight supply, interest rates doubling in the past year, and rates across much of the country remaining relatively flat, the barrier to entry has never been more challenging to achieve the American Dream,” said Pierre Debbas, managing partner at the firm. Romer Debbas is a real estate law firm.
“The intent of providing access to credit to low-income borrowers with low credit scores and down payments is an important initiative to help expand the demographic that could theoretically acquire a home and build wealth,” he said. “However, doing so at the expense of other consumers who are already struggling to enter the market is a mistake.”
That criticism is misplaced, said Jim Parrott, a nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors, adding that it “conflates two separate, largely unrelated moves with government-sponsored corporate pricing.”
in blog post, Parrott explains that the increase in fees for vacation homes and high-value loans allows Freddie and Fanny to lower fees for some of the other buyers.
He also notes that the suggestion that fees are lower for those who make a lower down payment misses a critical point. Any loan with a down payment of less than 20% must have private mortgage insurance.
“So those who put in less than 20% pose less risk to GSEs and should pay lower fees to GSEs,” Parrott wrote.
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