Effective May 1, 2023, a new rule will go into effect in which prospective homebuyers with very good or near-perfect credit will see an increase in mortgage fees, while those whose credit scores need work will see their fees go down.
The new rule that is being implemented by the Federal Housing Finance Agency (FHFA) increases low-level price adjustments (LLPAs) for borrowers who would otherwise not be considered credit risks and lowers them for risky borrowers. LLPAs are fees imposed on borrowers and are based on the riskiness of the loan, credit score, loan-to-value ratio, whether or not the house is owner-occupied and the number of units in a home.
The LLPA was incorporated into conventional mortgages in 2008 when Freddie Mac and Fannie Mae saw decreased capital and higher risk as borrowers began to default on government-backed loans. Rather than imposing fees across the board, both Fannie and Freddie decided to place higher LLPAs on riskier borrowers and a nominal fee on borrowers they considered “safe.”
As of May 1, 2023, those with a credit score between 680 and 780 will face an increase in LLPAs and those who put 15%-20% down will pay for even higher fees. This means someone with a 740 score who makes a sizable down payment will face a 1% surcharge — up from 0.25% in the past. It is estimated that those borrowers could pay an additional $480 to $720 a year in mortgage fees. Meanwhile, those who have a credit score of 679 or lower and make only a 5% down payment will have their LLPAs cut in half from 3.50% to 1.75%.
The White House applauded this new rule, saying this will encourage more people of color to buy homes and remove the barrier of using credit scores to determine the ability to afford a home. According to FinMasters, the average credit score in white communities in 2021 was 727. For Hispanic areas, the average score was 667, while the average score in Black communities was 627.
While some believe this will help increase the percentage of minority homeowners, others criticized the rule, saying that it punishes those who saved up their money and paid their bills on time, while those who accrued debt and failed to pay their bills in a timely manner were being rewarded. The FHFA said these tweaks in the mortgage fees are “minimal” and will not impact the safe borrowers’ payments that much.
