I'm sure you've seen by now the news all over the internet about a new unfair tax on mortgage borrowers with higher credit scores.
Some people have gone so far as to suggest that they could intentionally lower their credit score in order to get a better deal, but before you stop paying your bills in the hope of cashing in, let's separate fact from fiction.
First, and most importantly, you'll absolutely not get a better deal on your mortgage rate if your credit score is lower, no matter what you hear on the news.
This all has to do with changes to loan level price adjustments, also known as LLPAs imposed by Fannie Mae and Freddie Mac. Which are the two government agencies that guarantee a vast majority of the new mortgages.
LLPAs are also sometimes called "discount points", which is somewhat misleading since they're not a discount, they're actually added fees.
One point is 1% of the mortgage amount that you're getting. So a $400,000 mortgage, one point is $4,000.
LLPAs are based on a loan feature such as your credit score and the loan to value ratio among a few other things. They've been changed several times over the years, and this new change was actually announced in January of 2023 for all loans sold to Fannie or Freddie after May 1st, 2023.
Many lenders implemented these changes weeks or months ago, especially for loans that are locked for a longer period of time. It's important to know this is only for conventional loans, not FHA or VA, and this does not affect any loans that are already out there.
So if you already own a house, this has no effect on you, whatsoever.
So are low-credit borrowers already getting a discount while high-credit borrowers are paying more?Not exactly.
And this is where the confusion comes in.
Also, from you here on out, please note that there is no opinion offered in this video whether this is good or bad. The only goal in this video is to clear up confusion and offer facts.
It is true that LLPAs are changing in a way that improves costs for those with lower credit scores and increases costs for those with higher credit scores. But people are confusing the change for the actual cost.
A low credit borrower is not paying less than a high credit borrower. The gap between what they pay is just smaller than what it was.
All value judgments and political commentary aside, the change amounts to a tweak of an existing fee structure in favor of those with lower credit scores and at the expense of those with higher credit scores.
But there is no scenario where someone with a lower credit score will have a lower fee. So don't go skipping those credit card payments in the hopes of getting a lower rate.
Also, it's important to note this is all about points or fees tacked onto the loan, and it does not change the interest rate that you pay. Lower credit borrowers will still always get a higher rate than high credit buyers.
Let's start with the changes that has everyone so upset.
The following tables show the difference in LLPAs before and after the change.
Red equals rising costs, green equals falling costs. If you saw only this chart, it's understandable.
You might think that someone with a 640 score was paying less than someone with a 740 score. But again, these are just the changes.
Now let's look at a table with the outright LLPAs for the same matrix of credit scores and loan to value ratios.
This is the new structure after the implementation of the change, and as you can now plainly see, if you have a score of 640, you'll be paying significantly more than if you had a 740. Using an 80% loan to value ratio.
As an example, your LLPA at 640 is 2.25% versus 0.875% for a 740 score. That's a difference of 1.375%. Or just over $4,000 on a $300,000 mortgage. This is almost half the previous difference, and that's certainly a big change.
So why is the government doing this to people with higher credit?
Fannie and Freddie technically have a mission to promote affordable homeownership.
The bottom line is we can bicker all we want about if any of this is fair or not, but these kind of adjustments are not a new thing. You are still going to be better off having a higher down payment and better credit score, so please don't go around ruining your credit because you saw some internet meme or article headline taken way out of context.
If you're thinking about buying or selling a house this year, you're in South Florida and want to speak with a mortgage professional about your options, please let me know and I can connect you with some of the best loan officers in South Florida.
Posted by Andy Mandel on
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