Brennan McCarthy, CFP® - Director of Financial Planning at Boulevard Wealth Management
Have you heard about the changes going into effect on May 1st surrounding new mortgage fees?
The headlines indicate that low-credit borrowers will soon start getting lower interest rates on new mortgages than those with higher credit scores. This is not exactly the case, but the changes are important to understand for those looking to secure a mortgage in the near future.
The changes are occurring via Fannie Mae’s Loan-Level Price Adjustment (LLPA) and only affect conventional loans—this matters because people with lower credit scores don’t often fit as well within the conventional financing system, and end up financing other programs like FHA, VA, or USDA anyways.
So what are LLPAs?
LLPAs are the reason why most people end up paying more than the standard “mortgage rate” posted on Freddie Mac’s website. These extra fees traditionally apply for a handful of reasons (mortgaging an investment property, putting less than 20% down, doing a cash-out refinance, lower FICO scores, etc.).
If the headlines aren’t accurate, what is changing then?
It is true that people with below average credit rates will get a slightly better rate on their mortgage than they would have before (the obvious problem mentioned above is that since underwriting standards aren’t changing, it’s still unlikely they would be able to qualify for a conventional loan). On the flip side, a person with a 760 FICO score making a 20% down payment can expect their rate to be about 1/8 of 1% (0.125%) higher than it would have been before the changes.
For the numbers people out there, the chart below (from Matthew Graham of Mortgage News Daily) is a helpful way to see how the additional fee the LLPAs tack on to borrowers of various credit scores and LTV ratios:
This chart makes it clear that people with higher credit scores will still receive a better mortgage rate than those with low credit scores. The same can’t necessarily be said for making a higher down payment, though. It appears that in all cases, making the lowest down payment possible will result in a lower interest rate than if a borrower were to put 20% down.
The primary change is the spread has tightened. In other words, it’s no longer as impactful to have a good credit score as it was in the past. It still clearly matters, but not quite as much as it did in the past.
How can you use these changes to your advantage?
- For those with high credit scores (780 and above):
- If you can afford to make a high down payment (25% or greater), these changes won’t affect you.
- If you can’t make a large down payment, you’ll likely benefit most from putting as little down as possible (usually 3-5%)
- You’ll benefit from closing on a loan before May 1st (unless your down payment is low)
- You’ll pay the lowest fees on putting 3-5% down
- You’ll benefit from waiting until after the May 1st changes are put in place if you can qualify for a conventional mortgage
Graham, Matthew; Mortgage Daily News, https://www.mortgagenewsdaily.com/markets/mortgage-rates-04212023