Some homebuyers who have strong credit ratings will be paying more for Fannie Mae or Freddie Mac-backed conventional mortgages, while others with less credit scores will pay less.
In general, people with good credit scores will pay less overall than those with poorer credit. The Federal Housing Finance Agency’s fee restructuring caused some controversy, as critics claimed that the new fees punished applicants with good credit.
Takeaway: No matter what shape your credit is in, you should check the new FHFA fee structure to see how it affects your homebuying upfront costs.
Facts about the FHFA’s new mortgage fees structure
The FHFA updated its matrix for upfront fees on purchase loans, refinances with limited cash out and refinances backed by Fannie Mae or Freddie Mac. Fees, also known as LLPAs or loan-level price adjustment fees (altering the mortgage rate), are usually converted to percentage points.
New fee structure for…
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Went into effect May 1
- Will impact only private bank loans in the U.S. and not federal loans such as FHA, VA, or USDA?
- Some — but not All — People with Strong Credit will Pay Higher Fees Than Before, while Some but Not All People with Weak Credit Will Pay Lower Fees Then before. This equation is dependent on the size of your down payment.
- In general, people who have good credit will pay less in terms of fees than those with weak credit.
- For people who scored the highest (780 or higher), the fees either went down, or in many cases remained the same.
What changes are coming to mortgage affordability
This is an example showing how the new changes will result in a borrower with a better credit score paying more and one who has a poorer credit score paying less. Both borrowers make 20% of a $300,000.00 loan.
High-score applicants — Previously, someone who had a score between 760 and 779 would have been charged an upfront fee of 0.250% or $750. The fee has been increased to 0.625%, or $1,875.
Applicant with lower credit score — Previously, a person who had a credit rating between 640-659 was charged a fee of 2.750% on the mortgage base rate. This would amount to $8,250. This fee is now reduced to 2,250%, or $6750.
Under the new system, the applicant with a lower score gets significant relief but pays still more than four-times as much as borrowers who have higher scores.
Critics claim that the FHFA charges borrowers who have high credit scores higher fees to compensate for fee reductions offered for homebuyers with lower scores. The FHFA claims that the new system reflects the current risks for all credit profiles, better protecting the banks while also promoting a more equal access to home ownership.
Mortgage Shopping Tips
Take the time to organize your finances and you will be able to enjoy lower mortgage fees and rates.
- Verify your credit report and score. Check your credit scores to make sure that there aren’t any errors. Credit bureaus will allow you to dispute any errors on your report.
- Increase your ratio of debt to income . Either earning more or paying down debts, or even both can qualify you for a larger mortgage.
- Increase your downpayment. A small deposit may be enough to qualify you for a loan. However, a larger downpayment will reduce your mortgage principal, saving money on your mortgage over time. It is possible that you will not be required to pay private mortgage insurance.
- Compare rates and guidelines. Each lender offers different interest rates, fees and other options. This can affect your monthly payment. Multiple quotes can give you more negotiating leverage and help you find the right mortgage lender.