Are High Credit Score Buyers Paying the Price for Lower Score Buyers?

In the market for a home? I feel ya!!? As a realtor?? in Hampton Roads, I’ve been seeing these ? articles everywhere with information about loan fee add-ons beginning May 1 that are affecting my buyers, and ultimately my sellers, when they obtain their mortgage loans.

Is it really possible that home buyers with credit scores 680 and above are paying a higher price for their home financing than buyers with scores below 680?? It depends.

?These premiums are known as Loan Level Price Adjustments (LLPA’s), and are intended to make mortgage financing more equitable across all credit scores.

That doesn’t mean that everyone with a great score is going to be paying more for their mortgages.? But it does mean those with scores less than 680 won’t be paying as much of a premium as they would have paid last year buying a home with those same scores.

The LLPA’s are fees added to mortgage rates. They are based on a buyer’s borrowing credentials such as credit score, amount of down payment, whether a home is owner-occupied and, coming in August, how much debt you carry compared to your income.

Headlines are reading, “How the US is subsidizing high-risk homebuyers — at the cost of those with good credit”, (New York Post, April 2023).

Concerns are heightened by the timing of the premiums. They come at a historically challenging period for home buyers already struggling with interest rates twice as high as 2 years ago, an unprecedented lower number of homes from which to choose. Many times buyers are still having to compete for the same homes with other buyers and pay more than list price for the home to have a winning contract.

So it’s understandable how this news can be disturbing to buyers looking to buy homes now.

Let’s look at the facts around these mortgage cost changes.

What agency enacted these changes?

The Federal Housing Financing Agency, under whose authority the two top guarantors of home mortgages, Fannie Mae and Freddie Mac fall.

How long have buyers been paying these premiums?

These premiums have been baked into financing costs since I’ve been in the local Hampton Roads real estate market…? and that’s a long time!.? Historically, the better a buyer’s credit score, loan-to-value ratio, and owner-occupancy status, the better pricing they could get. We’re used to this with auto financing and credit cards. We know borrowing rates improve as credit risk diminishes. Home mortgages are the same.?

When did these changes occur?

Changes were announced in January 2023, effective May 1, 2023.? The May 1st date is the loan delivery day - the date a closed loan is delivered to the secondary markets. Any loans closed and sold by the banks and mortgage lenders by May 1st must include these premiums. So borrowers, in fact, have been affected by these changes for at least the last 30-60 days.

Who is affected by these changes?

Borrowers with credit scores 680 and above in the past have had better pricing compared to those with lower scores. That is still true, although that pricing gap is not quite as wide as it has been. A portion of that better pricing premium has been given to borrowers with scores less than 680, with loan-to-values also considered in the cost of financing.

How does that play?

These pricing fees/penalties are paid upfront for the interest rate a borrower locks in at as “points” at closing… 1 point equaling 1% of the loan amount. The points can be reduced by paying a higher rate, basically absorbing that fee cost in the monthly mortgage payment.

If your credit score is below 680, the penalty for having a lower score is now smaller than before. But don’t intentionally skip your next car payment. It still costs more to have a lower credit score compared to a higher one, but just not as much as it did.?

For example, if you have a credit score of 659 and you’re borrowing 85% of the home’s value, you’ll have to pay a fee equal to 2.5% of the loan balance.? Before these changes, the fee for a credit score of 659 would have been a substantial 3.25% of the loan balance. On a $267,750 loan amount, on a loan with a 15% down payment, an average priced home in Hampton Roads of $315,000, would have a $8701 premium for a conventional loan, versus today’s $6693 premium with the reduction in fees.

What about our higher score borrower? With a credit score of 780 or above, you would have to pay a .375% fee. Generally, they will now be paying slightly more than they were under the previous fee structure. In the same scenario of a 85% loan with a $267,750 loan amount, the .375% would cost the buyer an additional $1,004 at closing, or approximately $45 additional to their monthly mortgage if the buyer chose to finance it versus pay in at closing.

The chart above illustrates these changes, not the total in fees, with green and yellow cells representing where things have become more affordable, and orange and red cells indicating where costs have increased. All values in the chart refer to a percentage of the loan balance charged as an upfront fee or added to the monthly payment, if interest rates allow.

What does this mean to buyers in the Hampton Roads market?

It’s important to note that these changes apply to Conventional loans only.?The fees do not apply to FHA and VA loans!

In the last 6 months, FHA and VA loans accounted for 5,615 of the 10,797 homes financed in Hampton Roads.

That’s 52% of homes financed in our market, which is typical for Hampton Roads with our strong military presence and our lower home sale prices.

To help buyers in this challenging market, both FHA and VA announced changes that will save buyers money when they finance homes.? Effective March 20, 2023, FHA announced a 30-basis point reduction to the annual mortgage insurance premiums (annual MIP). The premium was reduced from 0.85 percent to 0.55 percent for most homebuyers seeking an FHA-insured mortgage, helping them save hundreds per year and allowing buyers to qualify for a larger loan amount.

The VA made a reduction in the Funding Fee effective April 7, 2023 which saves veterans up to .30 in fees.

Take aways for Hampton Roads buyers:

When shopping for a mortgage, compare FHA or VA loan costs to conventional loan costs.??

Without the additional add-ons of fees, FHA or VA financing could cost less than conventional financing.

Never assume one type of financing costs more or less than the other, even if one or the other was better recently for a friend.?

The characteristics of each loan applicant is unique and these characteristics can have a substantial effect on your loan pricing.

If you locked in a loan rate prior to May 1, 2023, these costs are already included in your pricing.

You may have the choice to pay fees upfront, or roll into the interest rate, if pricing allows (it doesn’t always).

At last week’s average 6.75% interest rate, every $1000 added to? will cost you an additional $6.48.

Home purchase loans benefit more from the fee decreases than refinances.

Another change in fees is looming ahead in August.. Conventional loans will also carry an additional fee based on monthly total debt compared to total income, known as “DTI” - debt to income ratio. If your dti is higher than 40%, and you are in the market, lock your loan in as soon as possible and close as soon as possible to prevent having to pay this additional fee.? The premium will be charged on Conventional loans sold to the secondary market August 1st, 2023. Mortgage companies will have to start adding the fee to loans locked 60-90 days prior to then. If your debt to income is 40% or less, there are no premiums applied.??

Deb Mundy is a native of Hampton Roads, working in real estate since 1983. She worked in the secondary market for Goldman Sachs and Lehman Brothers, and most recently as a Realtor?.

She is also a Senior Real Estate Specialist?.?

[email protected]

757-402-2310