You’ve been duped if you think the government plays Robin Hood by forcing people who have good credit scores to pay higher mortgage rates than those with poor credit.
Mortgage rates are lower for home buyers who have high credit scores. Lower costs are also associated with larger down payments.
You may have thought differently because the mortgage fee was updated and some of the comments around it were more negative than positive.
A new look at mortgage fees
Misinformation was spread by a federal housing finance agency, a regulator that recalculated mortgage fees. Changes took effect on May 1, 2009. The changes took effect on May 1.
FHFA did not explain in details the reasons behind the changes. The critics reacted the same way your teacher would have if you had handed in your math test to class without displaying your work. They asked for supporting documentation. The FHFA still hasn’t given it. Commentators and politicians often filled in blanks about FHFA process because they lacked details.
Their main complaint was that those with good credit were being charged too much, so as to allow people with poor credit to be overcharged.
Tucker Carlson, in his last Fox News episode, criticized the policy of fees April 21, saying that “people with good credit will have to pay more on their mortgages because they are subsidizing people who don’t maintain good credit.” ”
Sens. Roger Marshall (R-Kan.) and Thom Tillis (R-N.C.), in a press release on April 26, said that the new fees “penalize Americans for managing their money responsibly to subsidise high-risk, low-credit borrowers.” ”
Stacy Garrity is the Pennsylvania treasurer. She wrote to FHFA director, May 1, that those who pay a down payment of 20% or more will be charged the highest fee — this would be one of the worst incentives possible. ”
When you look at the facts, it’s clear that these allegations are not supported by any evidence. Garrity’s letter was signed by fiscal officers in 27 states and relied upon an incorrect chart found in an article on the changes to fees.
Lower fee for higher credit score
Let’s start with a brief explanation of fees. Fannie Mae, Freddie Mac and the FHFA are regulated by FHFA. They set lending criteria for conventional mortgages. Fannie Mae and Freddie Mac charge up-front fees that are dependent on the credit rating of the borrower, loan-to value ratio and percentage downpayment. Fannie and Freddie call them credit fees, while Fannie refers to them as loan-level adjustments.
Fannie Mae and Freddie Mac are protected from losses if borrowers default on house payments by the upfront fees. The fees are higher for those borrowers who have lower credit scores, smaller downpayments or both.
Consider three buyers of houses. Each makes a 20% down payment, and each borrows $300,000. Each borrows $300,000. They each put down 20%. Only the credit scores of each buyer differ. The only difference between the buyers is their credit scores. One has a score of 796 (in the top 10% according to Urban Institute, an organization focused on public policies), one has 734 (in the middle with 50% of borrowers scoring below), and another has 644 (amongst the bottom 10 %):
A buyer who has a credit score of 796 will pay $1,125 as an upfront fee.
A buyer who has a score of 734 will have to pay $3,750.
A buyer who scores 644 will pay $6.750.
The claim that those with higher credit scores will pay more upfront fees is a myth. As credit score drops, upfront fees increase.
These fees are not likely to be listed in the loan documents. Lenders will instead pass on the costs in the form higher interest rates. The lender may adjust the origination fee to fine tune it. The lender may adjust the fees and increase the rate for the home buyer who has a score of 796, or by 0.125 points.
Buyers who put down more money pay less when you include private mortgage insurance. Consider two borrowers each with a 734 credit score, borrowing $300,000. They both put down less than 20 percent, and PMI is triggered. During the first five-year period:
An initial fee of $7200 plus PMI monthly premiums is paid by a buyer who has a down payment of 15%.
An 9%-down buyer pays $12,525 for the upfront fee plus PMI.
A buyer who pays 20% upfront will pay $3,750 and not have to worry about mortgage insurance. The upfront fee for a downpayment of 9% is less than that for 15%, however the premiums for mortgage insurance are higher. A comparison of fees that does not include PMI is incomplete.
Many people are paying higher fees than before
A second complaint of critics is based on fact: many homebuyers will be paying higher fees under the new fee schedule than they did before May 1. Home buyers with credit scores between 680 and 779, and down payments between 5 and 25 percent are the hardest hit. According to Attom Data Solutions – a provider of property data – the median downpayment in 2022’s third quarter was only 9%. )
Let’s say a buyer has a credit score median of 734, and they have a $300,000.
The upfront payment is higher by $1,125 with 9% than it was before May 1.
The fee increases by $2250 if you pay 15%.
If you take 20% off, the price is $1,500 more.
Sandra L. Thompson, FHFA director, defended the change in an April 25, 2014 statement. She wrote that the new fees were “more closely aligned with expected financial performance of the loans and their risks.” The FHFA updated the upfront fees to reflect the changes in the expectations of borrowers. In eight years, the fees hadn’t been changed.
It is the FHFA’s primary job to make sure that Fannie Mae and Freddie Mac won’t require another taxpayer-funded bailout, like the 187.5 billion dollars they received after the financial crisis of 2008. Fees on mortgage giants are meant to help them strengthen so that taxpayers don’t need to recapitalize the companies again during an economic recession.
The FHFA did not provide any data to support the changes in fees. The FHFA assumed, in a naive way, that people would accept the word of its agency.
Lower fees for those with poor credit scores
The upfront fee for homebuyers with credit ratings above 680 was increased, but it decreased for those with scores under 680. This is the complaint behind Marshall and Tillis’ letter, which complained about the new fees as “an attempt to lower mortgage rates for individuals who are more risky and have low credit scores while forcing rates up for those with high scores.” ”
Concerns go beyond Congress. Pierre Debbas is the managing partner at Romer Debbas LLP in New York City. He imagines a homebuyer with a good credit rating and a 20% deposit. Debbas said the changes sent a clear message to the buyer: “We will increase your interest rate to pass on the cost to you. This way, we can offer lower rates for those with less skin in the games, i.e. equity or higher risk loans. ”
In practice, however, those with poor credit and low down payments will not benefit from the reduced fees. FHA is better than PMI.
FHA will be used by low-score borrowers
The PMI is only required for conventional loans with down payments less than 20%. The Federal Housing Administration offers mortgage insurance. FHA insured loans are cheaper than private loans, especially for those with low credit scores.
In particular, for the first five-year period, FHA loans are less expensive than private loans.
Buyers with credit scores below 740 and down payments less than 5%.
Buyers with credit scores below 720 and down payments less than 10%.
Buyers with credit scores below 700 and down payments less than 15%.
Buyers with credit scores below 660 and down payments less than 20%.
Bottom line: Mortgage lenders who are attentive will offer FHA loans for many buyers that have lower credit scores. If buyers with lower credit scores don’t get conventional loans, high-score purchasers aren’t subsidizing these buyers.
Marshall and Tillis’ offices did not respond to comments. The Pennsylvania Treasurer’s press secretary responded by citing an article from The Hill, which, in turn took the information from a Forbes Advisor piece that contained an incorrect chart.
Truth about upfront charges
Mortgage fees for home buyers with higher credit scores are lower than those with lower scores.
When mortgage insurance is taken into consideration, purchasers with larger down payments will pay less than those with lower down payments.
According to the FHFA, fees for buyers have increased over time to reflect changes in the risk.
The upfront fees for conventional mortgages have been reduced. However, FHA loans are still better suited to buyers.
These are the facts.