Home prices in the United States have increased by 30% from 2020 to 2022. Mortgage rates are now at the highest levels since 2002 and continue to bounce between 6-7% this year. And the increases just don’t stop. To add insult to injury, a new mortgage fee rule will impose additional fees, at least on some.
As of May 1, 2023, and loans guaranteed by Fannie Mae or Freddie Mac, regardless of the lender, will be subject to a new matrix of fees based on credit score and down payment, and other factors.
The Political Debate
These changes are part of the Federal Housing Agency’s goal to provide equitable and sustainable access to homeownership. Equitable and sustainable sound like good things. Yet, once the guidelines became clear, the topic became a hot topic among political debate circles since some people will benefit from the changes with a reduction in fees while others will end up paying more.
Does logic dictate these changes?
Who Wins? Who Losses?
With the new fee schedule, the penalty for having a lower credit score will be smaller than it was before the changes, and having a higher credit score could mean you pay more.
For example, if you have a credit score of between 640 to 659 and borrow between 75-80% of a home’s value, you now pay a fee equal to 2.25% of the loan balance. Before the change, the same borrower would have paid a 3% fee. On a hypothetical loan on the average home in Florida ($415,762), with a 25% down payment, the savings equals $2,338.66.
Yet those with a higher credit score, between 740 to 759 would have paid a fee of 0.5% on a loan with an 80% loan to value ratio. Under the new rule, the fee increases to 0.875%. Using the same hypothetical loan, the new regulations will require an additional $1,169.34 in fees.
In yet another hypothetical scenario, a borrower with a credit score above 780 with a 25% down payment, the new fee is zero.
The lowest fees on the new fee schedule still go to those with the highest credit scores. Yet it still feels like the middle class is taking the hit.
More Changes to Come
The Housing Finance Agency originally planned on an additional charge dependent on your debt-to-income ratio to also take effect in May; however, it was delayed after pushback from the industry. It’s now slated for an increase as of August 1st. Starting this summer, the Agency is planning on charging borrowers a 0.375% fee on their loan amount if their total house payment plus other debts exceed 40% of their monthly gross income. The agency still has some kinks to work out, but overall encouraging good debt to income levels seems like a win for the lending agencies and is also usually a win for an individual. The downside, of course, is that those who are potentially borrowing too much or already have a high debt load will be subject to another fee.
While government regulations often seem to have forgotten how to reward good behavior and provide incentives to make good financial choices, it’s still better to take the high road. Ultimately, if you need a mortgage to finance your purchase, you have limited options regarding your fees. Fannie and Freddie loans will most likely remain the best deal. Your credit score remains the largest factor in determining your mortgage rate. Both healthy credit scores and good down payments still reward you, just not as much under the new laws.
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