Graham writes, Seemingly overnight, the internet is awash with news regarding a “new,” unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score to get a better deal.
Before you stop paying your bills hoping to cash in, let’s separate fact from fiction. First and most importantly, you will NOT get a better deal on a mortgage rate if your credit score is lower, even if your nephew just texted you a screenshot of a news headline saying, “620 FICO SCORE GETS A 1.75% FEE DISCOUNT” and “740 FICO SCORE PAYS 1% FEE.”
So why would your nephew make such a claim?
This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the “agencies”), the two entities that guarantee a vast majority of new mortgages. LLPAs are based on loan features such as your credit score and the loan-to-value ratio, among other things. They’ve been changed several times, and a substantial change was announced in January of this year.
Wait. This news is from JANUARY?! So why are people talking about it now?
People are confused because they don’t understand how “delivery dates” work regarding Fannie and Freddie. Changes impacting fees and guidelines are almost always implemented based on the date the loan is “delivered” to Fannie/Freddie. “Delivery,” in this context, typically occurs a matter of weeks AFTER the loan is closed, although it can be more than a month.
Now consider that a secured loan has often been quoted and locked for more than three weeks–call it a month to be safe. Since these changes affect loans delivered on or after May 1st, 2023, lenders began implementing them weeks ago. Many lenders implemented them months ago–especially for loans that are locked for more extended periods.
So low credit borrowers are already getting a discount while high-credit borrowers pay more?
Not precisely, and this is where the confusion comes in. Also, from here on out, please note that there is no opinion on whether this is good/bad/etc. The only goal is to clear up confusion and offer facts.
LLPAs are changing in a way that improves costs for those with lower credit scores and increases costs for those with higher credit scores (in many cases, anyway). But people are confusing the CHANGE for the ACTUAL price.
So a low-credit borrower is paying at least a high-credit borrower? So the gap between what they produce is just smaller than it was?
YES! Again, 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. Still, there’s no scenario where someone with lower credit will have a lower fee. In other words, take advantage of those credit card payments to get a lower rate.
Fannie and Freddie technically have a “mission” to promote affordable home ownership. Here is their regulator’s statement on the topic, the FHFA: FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework.
In the first two tables, there is more of an improvement for the lower FICO rows on PURCHASES (i.e., home ownership vs. refi).
Any other misconstrued news I need to know about?
Yes, actually. While not as viral as the LLPA stuff, much press has been on a new 40yr FHA mortgage. Unfortunately, THERE IS NO NEW 40yr FHA LOAN! However, lenders who collect payments on FHA loans have a new option to offer loan modifications with terms of 40 years to borrowers who cannot pay their existing FHA loans.