At the same time, the payments for many new mortgages in the US have changed. In some cases, change is very difficult, for better or for worse. Let’s break it down.
What do you mean by “paid/paid?”
Refers to Loan Pricing Agreements (LLPAs) issued by Fannie Mae and Freddie Mac (“agencies”), the two entities that guarantee most of new mortgage. LLPA is based on credit factors such as your credit score, loan-to-value ratio, occupancy (owner-occupied vs. unoccupied), and recent enough, your debt to income ratio.
What borrowers/loans does it apply to?
Any loan is approved by one of the agencies regardless of who is issuing it. This is the largest loan in the US. Examples of non-conforming loans are FHA/VA as well as some specialty products. “Nonconforming” loans are not affected in this regard because they are not approved by the agencies. A common example of a non-performing loan is a jumbo loan from a commercial bank or credit union.
When does this apply?
This applies to loans approved by agencies beginning May 1, 2023. This means that many lenders will begin implementing the changes in March/April.
What has changed, in short?
The fine penalty for getting a score below 680 is now less than it used to be. It costs more to get a lower score. For example, if you have a credit score of 659 and are borrowing 75% of the home’s value, you will pay a fee equal to 1.5% of the balance. loan but you don’t pay a fee if you have 780+ score. But before these changes, you would have paid a fee of 2.75%. In a typical $300k loan, that’s a $3750 difference in closing costs.
Elsewhere on the spectrum, it was worse. Borrowers with higher credit scores will usually get a little better than they did under the original structure. The chart below shows the differences. The green and yellow cells show that things are cheaper than they were. orange and red cells = more expensive. All rates are based on a percentage of the loan balance that is provided as a down payment. It doesn’t have to come out of your pocket upfront because lenders can offer higher rates interest in some cases and pay these costs for you (but there are still costs, and you are always paying specifically in the case of high interest rates).
There are many other variables that are not easily translated into a heatmap table. Most notable is the new debt payment ratio DEBT-TO-INCOME (DTI). This will be controversial in most cases because the calculation of income can be quite subjective and the calculation of debt can be legally “tweaked” with some of the long term planning and/or debt settlement. However, all loans approved by agencies have DTI attached to them. If your debt is more than 40% and you are borrowing more than 60% of the value of your home, you will pay more.
Here are some examples of changes:
- There are new credit ratings at 760+ and 780+.
- There is a big difference between high-balance and non-high-balance ARM loans (uncommon…most ARMs are not done through agencies)
- Lots of changes in 2-4 unit LLPA land
- There is a new LLPA for “low-cost financing” (a second loan or HELOC) but the previous LLPAs were more specific based on the LTV of the first loan and junior loans.
- HUGE increase in fees for most “Cash-Out” loans.
Where can I see real, tangible change?
If you have a loan in progress or soon, these changes will likely not apply to you. Again, most lenders don’t do it right away. Ask your lender for clarification. If you ask them on January 19th, 2023, they may not know the changes!
The official changes are here:
NOTE: at the top of that page, there is a link to the previous/existing LLPAs (or you can click here). Just be sure to note the text at the top of any page you’re viewing, so you know if it applies to loans before or after 5/1/2023 (and remember that the “after 5/1/2023” will refer to most loans that started in March/April).
Who decided that these changes should happen?!
The FHFA. This is what they said: https://www.fhfa.gov//Media/PublicAffairs/Pages/FHFA-Announces-Updates-to-Enterprises-SF-Pricing-Framework.aspx