Even under new loan-fee rules, borrowers with low credits scores pay higher fees (1.625% if a 660 score) than those with stronger credit scores (0.625% for 740).
A new federal rule that went into effect this month aims to improve mortgage accessibility for people with lower credit scores; however, some say that comes at the expense of homebuyers with strong credit.
On May 1, the Federal Housing Finance Agency (FHFA) updated the loan-level price adjustment matrix (LLPA). Some speculation in the media has included reports that the changes mean people with high credit scores will subsidize lower-income people and people with lower scores.
Shonna Lee, senior loan officer at Acopia Home Loans in Greenwood, said that is a misconception.
“The media puts this crazy spin on it that someone with lower credit is going to get a better rate than someone with higher credit,” she said. “In actuality, what really happens is that people with lower credit are going to be doing a different loan program because they’re going to be going for the government-based loans.”
LLPAs depend on loan features such as credit score, down payment, loan-to-value ratio and debt-to-income ratio. Those are among the top factors that prevent people with low credit scores from buying homes, John Dealbreuin said in a Wealth of Geeks article.
Federally funded loan guarantors Fannie Mae and Freddie Mac charge LLPA fees to lenders for guaranteeing a loan. Most lenders package the LLPA into the mortgage interest rate, said Eric Reed in SmartAsset Blog:
- Under the previous matrix, borrowers making an average down payment with a credit score of 660 would pay 2.25% in fees, while a borrower making the same down payment with a credit score of 740 would pay 0.25% in fees, Reed said.
- Under the new LLPA matrix, that same borrower with a 660 credit score will pay 1.625% of the mortgage value in LLPA fees, he said, while the same borrower with a 740 credit score will pay 0.625%.
“While much reporting has implied otherwise, the new LLPA matrix has not changed the basic relationship between higher and lower credit scores,” Reed said. “Borrowers with better credit will still pay significantly lower fees than borrowers with weaker scores. The difference is that the new system will increase fees for many borrowers with scores over 700, while it will decrease fees for many borrowers with scores under that mark.”
The new LLPA applies to all loans Fannie and Freddie guarantee, but excludes some, including those through the Federal Housing Administration (FHA).
“LLPAs are affecting a standard, conventional mortgage, not your government mortgages,” Lee said. “The reason why someone with a lower credit score is going to get a better rate is because they are doing a government-backed loan, such as FHA.
“It’s really not a true and accurate statement to simply say that because of having lower credit they are going to get a better rate. What’s really happening is that your government loans that are insured are just pricing out better than your conventional loans. Therefore, some of the conventional loan pricing is higher because that conventional mortgage is geared toward your higher-credit-quality clients.”
David Stevens, who was appointed by President Obama as assistant secretary of housing and federal housing commissioner, criticized the change.
“This was an intentional disruption to traditional risk-based pricing in order to subsidize the lower rates now offered to these higher-risk borrowers,” he said.
FHFA Director Sandra Thompson, appointed by President Biden, said she is focused on “facilitating equitable and sustainable access to homeownership.”
Lee said the change won’t affect her as a lender and isn’t something that should worry homebuyers.
“At the end of the day, everybody has to live somewhere,” she said. “Regardless of what the rates are, if you put a pencil to it and you look at someone’s financial wellbeing, renting five years vs. owning a home for five years? You never really lose owning vs. renting, in my opinion.
“Financially speaking, if you look at what you spend in rent and what you’ll have in equity at the end of those five years, you’ll always come out better, regardless of the rates. In general, the rates are still very normal. I don’t think it’s nearly as bad as some of the comments online are making it out to be.”
