Homebuyers with strong credit will face higher mortgage rates and fees to subsidize homebuyers with riskier credit scores, effective May 1.
04/25/2023 2:10 P.M.
2.5 minute read
A new federal rule from the Biden administration is requiring homebuyers with strong credit to pay higher mortgage rates and fees to support those with weaker credit who are also in the market to buy or refinance a house, according to an article from The Washington Times.
The fee adjustments will take effect on May 1 and will have an impact on mortgages originated at private banks nationwide as part of the Federal Housing Finance Agency’s push for affordable housing. The loan-level price adjustments, or LLPAs, will be implemented by the federally supported home mortgage companies Fannie Mae and Freddie Mac.
Under the new rule, homebuyers with credit scores of 680 or higher will, for instance, pay around $40 more per month on a loan for a home worth $400,000. Those who put down 15% to 20% on a home will be hit with the highest costs.
“The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well,” Ian Wright, a senior loan officer at Bay Equity Home Loans in the San Francisco Bay Area, told The Washington Times. “It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing.”
Mortgage rates are now above 6%, approximately double what they were in early 2022, which has had a significant negative impact on the housing market. The Federal Reserve quickly increased rates to lower inflation, which peaked at 9.1% last summer, a four-decade high.
“In the wake of a 3-percentage-point increase in mortgage rates, now is not the time to raise fees on homebuyers,” Kenny Parcell, president of the National Association of Realtors, told the Federal Housing Finance Agency earlier this year.
The new fees “will create extreme confusion as we enter the traditional spring home purchase season,” said David Stevens, a former head of the Mortgage Bankers Association who served as commissioner of the Federal Housing Administration during the Obama administration.
Following a barrage of criticism, the Federal Housing Finance Agency postponed an upfront fee for debt-to-income ratios of 40% or higher until Aug. 1. The ratio is derived by subtracting the monthly debt payments from the buyer’s total monthly income—a crucial tool that lenders employ to assess a mortgage applicant’s loan eligibility.
What’s Next?
Wright said this added uncertainty regarding the lending-borrower period will cause delays “during an already competitive real estate market lacking inventory.”
“For example, due to the low inventory and fierce competition, many buyers must close their transactions in less than 30 days to get their offer accepted,” he said. “The sudden rate changes will cause lenders to ‘re-disclose,’ adding additional days to the transaction. This puts extreme timeline pressure on the buyer and lenders forced to re-underwrite the file for the changes.”
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