New Mortgage Rules: High Credit Scores Will Mean Higher Mortgage Rates
President Biden's proposed mortgage rule has been making headlines lately for its attempt to address racial disparities in homeownership. One component of the rule, however, has drawn criticism from both homebuyers and industry professionals. The rule imposes a penalty on borrowers with FICO credit scores of 680 or higher, requiring them to pay a higher interest rate and a greater down payment. While the rule is intended to promote access to homeownership for those with lower credit scores, it may harm others with higher credit scores and discourage them from purchasing a home.
How will the proposed mortgage rule impact the overall housing market and the economy?
In this post, we will dive into the specifics of the proposed mortgage rule, the repercussions of penalizing borrowers with higher credit scores and what?middle-income buyers can do in light of it.
Rewarding Bad Payment Behavior?
The penalty for borrowers with a FICO credit score of 680 and above means that they would have to pay a higher interest rate and a larger down payment than those with lower credit scores. The rationale behind the penalty is to level the playing field for borrowers with lower credit scores and to encourage lenders to offer mortgages to those who may have been previously excluded from homeownership.
Historically, Black and Latino families have had lower homeownership rates compared to white families. One of the main reasons for this is because lenders have historically denied credit or charged higher rates to borrowers based on their race or ethnicity. This has made it more difficult for historically disadvantaged groups to obtain a mortgage and buy a home.The proposed rule would provide lenders with incentives to offer mortgages to borrowers with lower credit scores and smaller down payments, in an effort to increase access to homeownership for historically disadvantaged groups.
While this goal is admirable, the penalty for borrowers with higher credit scores has drawn criticism from some experts. For one, it may discourage those with higher scores from buying a home altogether, as they may feel that the penalty is unfair or punitive. This could potentially slow down the housing market and hurt the overall economy. And while it may increase access to homeownership for some, it could also lead to increased risk for lenders and potentially result in another housing crisis. This is because borrowers with lower credit scores may be more likely to default on their mortgages, which could put the entire mortgage market at risk.
Learning From Past Housing Market Crises
Larry Kudlow, Former National Economic Council Director, branded the rule as a "middle-class tax hike" and a "responsibility tax" that penalizes homebuyers who have done everything right. He argued in a recent interview that the penalty for borrowers with higher credit ratings and greater down payments is unfair and may discourage responsible borrowers from purchasing a home. Kudlow was also concerned that the rule will reward unethical behavior by giving lenders additional incentives to lend to customers with lower?credit scores and smaller down payments, possibly leading to another housing crisis.
Offering mortgages to those who cannot pay them, according to Kudlow, is a recipe for disaster, as proven by prior housing market crises. He adds that if someone cannot afford a home, even with a subsidy, they will be unable to carry the mortgage in the long run. This will eventually result in bankruptcy and long-term financial harm for the borrower. Kudlow then affirms that it is critical to ensure that borrowers can afford the properties they purchase, regardless of their credit score or down payment size.
Additionally, David Stephens,?former CEO of a leading mortgage lenders' trade association, is wary of the use of Fannie Mae and Freddie Mac in implementing Biden's proposed mortgage rule. Using these federally-backed companies to incentivize lenders to issue mortgages to customers with lower credit ratings and smaller down payments may not be the best course of action.
Fannie Mae and Freddie Mac were established to provide liquidity to the mortgage market and support homeownership, but they were also designed to operate under a set of disciplined standards to ensure safety and soundness. Stephens believes that using Fannie Mae and Freddie Mac as a means to implement the proposed mortgage rule could undermine these standards and potentially put the entire mortgage market at risk.
What Can You Do?
So in the midst of all this, what steps can middle-income buyers take to navigate the proposed mortgage rule and increase their chances of obtaining a mortgage??Here's a few tips to help you get started.
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If you're a middle-income buyer, it's important to know your credit score before applying for a mortgage. If your score is below 680, you may actually benefit from the proposed rule, as lenders will be incentivized to offer you a mortgage. However, if your score is above 680, you may be subject to a penalty, which could make it more difficult to obtain a mortgage.
2. Save For a Larger Down Payment.
The proposed rule may make it more difficult for middle-income buyers to obtain a mortgage with a lower down payment. As a result, it may be a good idea to save for a larger down payment. Not only will this increase your chances of obtaining a mortgage, but it may also help you avoid the penalty for higher credit scores.
3. Shop around for lenders.
The proposed rule will offer lenders incentives to offer mortgages to borrowers with lower credit scores and smaller down payments. However, not all lenders may offer the same incentives. As a middle-income buyer, it may be a good idea to shop around for lenders to find the best deal.
4. Consider waiting.
If you're a middle-income buyer with a high credit score and a larger down payment, it may be a good idea to wait and see how the proposed rule plays out. The rule is still in its proposal stage and may be subject to change. By waiting, you can avoid any potential penalties and ensure that you're making the best decision for your financial situation.
To wrap things up, the proposed mortgage rule aims to address racial disparities in homeownership, but it has faced criticism for potentially harming borrowers with higher credit scores. Experts caution against incentivizing lenders to offer mortgages to those who cannot afford them and compromising safety and soundness standards.?As a middle-income buyer, it's important to know your credit score and save for a larger down payment to increase your chances of obtaining a mortgage. You can also shop around for lenders to find the best deal and consider waiting to see how the proposed rule plays out. It's critical to ensure that you can afford the properties you purchase, regardless of your credit score or down payment size. By taking these steps, you can navigate the proposed mortgage rule and make the best decision for your financial situation.