CLEVELAND — When looking to buy a home, your credit score plays a major role in how much you end up paying but under changes that are set to go into effect next week, people with the highest credit scores could end up paying more in mortgage fees than those with the lowest scores who would see a decrease in their fees. These are part of Loan Level Price Adjustments by the Federal Housing Finance Agency set to go into effect May 1.
“The change that the administration made is meant to make it easier for borrowers who have a lower credit score,” said Danielle Halle, Chief Economist for Realtor.com. "The administration's stated purpose behind making these changes is to help make it easier for borrowers who have historically been disadvantaged and have had a hard time accessing credit."
Good for them, not so good for those with good credit.
“Because of these changes, the advantage of having a higher credit score, or making a larger down payment is not as big as it used to be," Halle said.
The changes would impact home loans backed by Fannie Mae and Freddie Mac and vary based on a number of factors, including credit score, size of down payments, types of home being purchased and more.
First-time homebuyers with high credit scores ranging from 720 to 760, for example, "could see an added $2,600 on a mortgage of $350,000," Halle said. "So it is real money, but not enough to break the bank."
We've highlighted the issue of equitable and sustainable access to home ownership in the past. Black home ownership, for example, has decreased over the last 20 years to 42%, the same rate that it was back in the 70s. HUD Secretary Marcia Fudge came to Cleveland two years ago to highlight the administration’s efforts to increase black ownership of homes by three million by 2030. Critics, however, say it's a penalty on those who have done the right thing and worked to raise their credit rating and a subsidy for those who maybe shouldn't be buying a home.
In a statement “Setting the Record Straight on Mortgage Pricing,” Federal Housing Finance Agency Director Sandra Thompson said, “Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
The statement goes on:
- Some updated fees are higher and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.
- Some mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk – despite many years passing since that framework was reviewed comprehensively. The fees associated with a borrower’s credit score and down payment will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.
- The new framework does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower’s total costs.
- The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances. The Enterprises’ statutory charters specifically include references to supporting low- and moderate-income families by earning returns on mortgages for these borrowers that may be less than the returns earned on other products. Indeed, Congress incorporated this into the Enterprises’ charters decades ago and it is a long-standing component of the Enterprises’ core business models.
- The changes to the pricing framework were not designed to stimulate mortgage demand. We publicly announced the objectives of the pricing review at its onset (as noted above), and stimulating demand was never a goal of our work.
