As a prospective homebuyer, you may have heard about the mortgage fee changes that took effect on May 1, 2023. These changes were implemented by the Federal Housing Finance Agency (FHFA) and affect conventional loans backed by Fannie Mae and Freddie Mac. They sparked considerable debate due to their potential impact on borrowers with varying credit scores. In order to make sure that you're as up-to-date as possible on what these changes actually do and don't mean, we went to the government agency responsible for these modifications as well as one of our local lending partners at Movement Mortgage. Here's a look at what we learned.
Understanding the Mortgage Fees Impacted
Mortgage fees refer to the costs associated with getting a mortgage. These fees contribute to the overall cost of your mortgage, affecting your mortgage rate as well as your monthly payments. In order to understand the recent fee structure changes, it's important to first have knowledge about who the primary players are, which fees have been impacted, and how credit scores influence mortgage fees.
The Role of the Federal Housing Finance Agency (FHFA)
The FHFA is responsible for the supervision and regulation of Fannie Mae and Freddie Mac1. According to the FHFA, these two government-sponsored "enterprises" perform an important role in the nation’s housing finance system by providing "ready access to funds on reasonable terms to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing." In turn, those lenders are able to use that money to offer mortgage loans to more people2.
Loan-Level Price Adjustment Fees Explained
To achieve their mission, Freddie Mac and Fannie Mae charge fees to compensate them for guaranteeing borrowers’ mortgage payments. These are called loan-level price adjustment (LLPA) fees. They are also known as "upfront fees," even though they are factored into monthly mortgage payments. Don Fowler, Sr. Loan Officer with Movement Mortgage says these fees are based on the risk associated with the borrowers and/or the type of loan they are getting or the type of property involved.
"They can change with credit scores and down payment amount, and they can change with types of property. A condo has a higher rate usually than a detached stick-built, single-family home."
FHFA Director Sandra Thompson said in a statement in April that having the fees in place helps Fannie and Freddie serve their mission by ensuring the safety and soundness of the loans they back as well as to protect taxpayers. This type of stability, she said, "attracts investors across the globe to provide liquidity for the U.S. mortgage market and, ultimately, reduces interest rates for homeowners3."
The Role of Credit Score in Mortgage Fees
Your credit score plays a pivotal role in determining your mortgage fees. Lenders use your credit score to gauge your credit risk or the likelihood that you'll default on your loan repayments. A higher credit score signals a lower credit risk and vice versa. Therefore, your credit score significantly impacts your mortgage rate, the upfront fee, and ultimately, the overall cost of your mortgage.
For instance, Don says that if you have a 740 credit score or more, you're likely to qualify for the best mortgage rates. This is because a credit score of 740 or higher is considered excellent and signifies a lower credit risk. As a result, you're likely to pay lower mortgage fees and secure a more affordable mortgage.
On the other hand, if you have a credit score of 640 or less, you're considered a higher credit risk. Consequently, you're likely to face higher mortgage fees. These fees could increase the overall cost of your mortgage and thus your monthly payments.
The New Mortgage Fee Changes
FHFA Director Thompson says the new LLPA fee changes that went into effect May 1 were simply the last of several changes announced since early 2021. The new fee structure includes the following.
- Targeted fee increases for second home loans, high-balance loans, and cash-out refinances.
- The elimination of upfront fees for certain groups core to Fannie Mae and Freddie Mac's mission, such as first-time homebuyers with lower incomes with the financial capacity and creditworthiness to sustain a mortgage.
- A recalibration of the upfront or LLPA fees for most purchase and rate-term refinance loans3.
Don explains the last change further.
"Depending on where you are on your credit score and how much money you're putting down on your purchase, or what your home appraises for at refinance, there are adjusters at all of these levels. They either make your rate or points that you have to pay a little bit higher or a little bit lower. The most common group that buys a home with us will have a 680-780 credit score. And they're going to pay a 5-20% down payment.
Impacts of the New Mortgage Fee Structure
According to Don, the LLPA fee changes are hitting those in the good credit group the hardest, especially those with 700-779 credit scores. Those borrowers are seeing rates or points they pay that are a little higher than they were. On the other hand, the LLPA fees went down for those with a lower credit score, so "their rates are a little bit better than they would have been before." The changes don't impact those with a high credit score as much.
FHFA Director Thompson offers these points of clarification for what she calls "misconceptions" surrounding the changes.
- Higher-credit-score borrowers are not being charged more, so lower-credit-score borrowers can pay less. As was true of the prior fees, the updated fees generally increase as credit scores decrease for any given level of down payment.
- Some updated fees are higher, and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.
- The new framework does not incentivize a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home’s value typically pay mortgage insurance premiums. These must be added to the fees charged by Fannie Mae and Freddie Mac when considering a borrower’s total costs.
- The targeted eliminations of upfront fees for borrowers with lower incomes – not low credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances3.
Navigating the New Mortgage Fee Landscape
Don notes that for those navigating the new mortgage fee landscape, it's important to remember that people with good credit will continue to get better rates than borrowers with low credit. The primary difference is that the LLPA fees will be a little higher than they were for homebuyers with good credit and lower than they were for buyers with lower credit scores.
Don provides an example using a $400,000 home purchase. "Everybody in this example can put down 20%. So the loan's $320,000. The rate for the individual with a 780 credit score is 6.9. If that same person had a 680 credit score, the rate would be closer to 7.9. And if the credit score was 640, that rate's closer to 8.1. So you can see the rates are still better with the better credit score.
Before these mortgage fee changes, the person with the 780 credit score would have paid about $400 less in fees. That doesn't mean that their rate necessarily would've been lower. It could have been. It just depends on where it all falls. But that's a $400 difference from before. The 640 credit score person is saving 0.75%, which equals about $2,400 in savings. That lowers the rate from where it would've been before, but it's still higher than the rate people with higher credit scores will pay."
The bottom line is that it's essential to still be vigilant when it comes to your credit score because it's always going to be much more beneficial to have a higher score than not.
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- Federal Housing Finance Agency. Fannie Mae & Freddie Mac.
- Fannie Mae. What We Do.
- Federal Housing Finance Agency. Setting the Record Straight on Mortgage Pricing: A Statement from FHFA Director Sandra L. Thompson.