On 1/19/2023, the FHFA announced that higher (and lower) fees are on the way for conventional mortgage loans guaranteed by Fannie Mae and Freddie Mac (agencies) on or after May, 1st 2023. This means that lenders will begin implementing these new fees sometime in March and April, anticipating delivery of those loans to the agencies on or after May 1st.
For buyers with lower down payments and lower credit scores (under 680) these are very welcome changes, but for the majority of buyers with credit scores between 680 and 779 your fees will be higher. Also, for the first time, the agencies will now charge fees for higher debt to income ratios.
Here are the major changes:
- The majority of buyers with debt to income (DTI) ratios higher than 40% will pay higher fees which will be calculated by the agencies automated underwriting system.
- Fees for down payments less than 5% will decrease across the board for all credit scores, but especially for credit scores below 680. This is great news for first time home buyers that do not have a lot of savings.
- The majority of buyers with credit scores of 680 or higher and with down payments of 5% or greater will pay higher fees.
- There are new credit score tiers of 760+ and 780+. Buyers with credit scores of 780+ will pay lower fees, which has been increased from the current top tier credit score of 740+.
Matt Graham with Mortgage News Daily posted a heatmap in this post that highlights these changes beautifully. It shows the effective changes in the fees as either an increase (shown as a negative number and in darker orange or red) or decrease (shown as a positive number and in yellow to green). The fees you see on the heatmap are “loan level pricing adjustments” (LLPA’s).
What are LLPA’s?
LLPA’s are risk-based pricing adjustments (fees) charged by the agencies that vary based on credit score, loan-to- value ratio, type of product, and various other factors, charged at the time of origination. The fees are charged to the borrower as a percentage of the loan amount.
For example, with these new changes, if you are putting 20% down and have a 740 credit score, you must pay a fee of .875% of the loan amount as part of your closing costs. So, if you have a loan amount of $200,000, that is a fee of $1,750 which is part of your overall closing costs. Currently, the fee is .500% or $1,000. So, in this scenario, the borrower’s fees are going to increase by $750. Using this same scenario, if a borrower met the new 780+ credit score tier, the LLPA would decrease from the current .500% to .375% which would be a decrease of $250 in their fees. So, for a 740 credit score borrower to not pay higher fees after May 1st, they would need a 780+ credit score.
On the positive side of these changes, if you have a 660 credit score and are putting 3% down, you would pay a fee of 1.25% of the loan amount as part of your closing costs. So, if you have a loan amount of $200,000, that is a fee of $2,500 which is part of your overall closing costs. Currently, the fee is 2.250% or $4,500. So, in this scenario, the borrowers fees are going to decrease by $2,000. This helps make a conventional mortgage more affordable for buyers with smaller savings and lower credit scores.
Note, you can offset the LLPA’s being charged to you as part of your closing costs by taking a higher interest rate which would lower your out of pocket costs.
To sum it up, borrowers with lower down payments and/or credit scores below 680 these changes are great, however for the majority of buyers with credit scores between 680 and 779 with a 5% to 25% down payment, your fees will be higher.
There are still other things to consider even though the fees are decreasing for lower credit score borrowers with lower down payments. Will the automated underwriting system approve the loan, would the PMI rates for a government loan such as FHA or Rural Development be better and result in a lower overall payment?
If you have questions about these changes or would like assistance with exploring what mortgage loan option is best for you, please contact us. We are here to help.