If you’re looking to buy a home, be aware that mortgages will change next month.
Starting May 1, upfront fees for loans backed by Fannie Mae and Freddie Mac will be adjusted because of changes in the Loan Level Price Adjustments (LLPAs), the fees that vary from borrower to borrower based on their credit scores, down payments, types of home and more. The changes relate to credit scores and downpayment sizes.
In some cases, people with higher credit scores may end up paying more while those with lower credit scores will pay less.
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What are the fee changes?
The entire matrix of fees based on credit score and down payment has been updated. If you have a top 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%.
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What loans do these fees apply to?
Any loan that’s guaranteed by either 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.
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Why are these changes being made?
These changes are part of the Federal Housing Finance Agency’s broader examination of fees to provide “equitable and sustainable access to homeownership” and shore up capital at Freddie Mac and Fannie Mae.
Last October, Housing Finance Agency eliminated fees for conventional loans for about 20% of homebuyers, which helped boost affordability for many Americans, particularly as housing costs rose.
Groups that benefit from that change include low- to median-income first-time homebuyers; buyers using the HomeReady (Fannie Mae) or Home Possible (Freddie Mac) low-down-payment mortgage options for low-income buyers; buyers using the HFA Advantage (Freddie Mac) or HFA Preferred (Fannie Mae) loans offered through state and local housing finance agencies; and single-family loans that fall under the Duty to Serve program that helps low- and moderate-income families finance manufactured housing and rural housing purchases.
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Are these positive changes?
It depends on which side of the spectrum you land.
“I can see both sides,” said Hakan Wildcat, mortgage area manager in Kansas for Guardian Mortgage. “Are there going to be people who qualify for a loan but maybe shouldn’t? Maybe, but that’s probably a very small percentage,” he said, adding,”But I can see at the end of the day, money is money and if you have great credit, why should you be penalized?
“We’re going to have to see it in practice and see how it plays out but overall, the thought process is probably sound and good,” he said.
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Will there be any more changes?
The Housing Finance Agency also plans a fee on August 1 for borrowers with at least a 40% debt-to-income 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.
As a standalone measure, debt-to-income ratio is not a reliable indicator of a borrower’s ability to repay, said the Mortgage Bankers Association, an industry group.
“A borrower’s income and expenses can change several times throughout the loan application and underwriting process,” wrote Bob Broeksmit, Mortgage Bankers Association president and chief executive, in a recent blog post. “This is especially true in today’s labor market, which is shaped by the growth in self-employment, part-time employment, and gig economy employment.” This would “create complications and problems for borrowers and lenders alike.”
The debt-to-income ratio fee will also likely affect a larger group of potential buyers, Wildcat said. “A lot of people fall above 40% debt-to-income ratio, and this is going to impact their purchasing power.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.