Recent media coverage on mortgage changes
You may have noticed recent media coverage on changes to mortgage qualifications and how rates are determined for qualified buyers. There have been many articles that have made reference to the changes that go into effect on May 1st and have suggested that a borrower will get better mortgage options with a lower credit score. It's important to understand that while the change will decrease costs for some with lower credit scores and will increase costs for some with higher credit scores, it may not be as extreme as some have assumed.
Loan level pricing adjustments (LLPA's) are fees that Fannie Mae and Freddie Mac charge lenders based on the risk of the loan. These price adjustments can impact the rate and fees of the mortgage.
The new changes on May 1st do not mean that those with lower credit scores will have better options or rates when it comes to obtaining a mortgage.
Let's take a look at an example to better understand this change:
Borrower A has a 679 credit score on a purchase putting 10% down. Prior to May 1st, the borrower would have paid 2.25 points.
After May 1st, the same borrower will pay 1.75 points, a reduction of .5%.
How about a higher credit score borrower?
Borrower B has a 750 credit score on a purchase putting 5% down. Prior to May 1st, the borrower would have paid .25 points.
After May 1st, the same borrower will pay .625 points, an increase of .375%.
Borrower C has a 780 credit score on a purchase putting 20% down. Prior to May 1st, the borrower would have paid .25 points.
After May 1st, the borrower will pay 0 points, resulting in a reduction of .25%.
Note that there are high credit score borrowers (780 and above) who will benefit from this change.
It is not new that Fannie Mae and Freddie Mac make adjustments to the pricing of loans to match changes in the market. As many of you may remember, last year they implemented a rate adjustment for second home loans. The current changes were introduced to advance their mission to facilitate sustainable access to homeownership.
See link to the FHFA statement below.
