Conventional home loans backed by Fannie Mae and Freddie Mac recently announced new pricing guidelines. In an effort to give potential homebuyers who have lower credit scores and on average less monthly income, effective in May, for those with good credit, such as someone with a qualifying credit score of say 750, might have to pay more in fees. As much as 0.75% for better credit borrowers. For those with lower credit scores, fees will actually decrease by as much as 2%. And that’s a lot.
This is a complete reversal of the previously instituted guidelines using LLPA, or Loan Level Pricing Adjustment. LLPA was put in place as both a response and a protection to the mortgage industry in and around 2008-2009. Using these parameters, those with excellent credit and a larger down payment would be granted lower-fee home loans and those with less-than-stellar credit would have higher fee choices. This was a result of the loosey-goosey lending patterns that ultimately led to both home price inflation and the mortgage crisis which ensued.
So what do we make of this? For one, it’s a little too early to tell, right? That might sound like a cop-out but we won’t see the results for at least several months, if not longer. But from my desk, I’m not sure how those who have managed their credit and careers responsibly should be punished in a certain sense by having higher priced mortgage choices. Yes, many of those who have depressed credit scores have more than likely experienced some short-term, life event that lower scores. An event such as marital problems, extended hospital stays are being laid off from work.
Those who are having credit issues certainly deserve some help and lowering fees by as much as 2% can help get those borrowers in homes at a lower cost. This lower cost is then offset by contributions from higher credit score borrowers. In effect, it’s a subsidy. Note, this is only for conventional loans backed by Fannie or Freddie guidelines. This does not apply to government-backed mortgages such as VA or FHA.
Anyway, so out the door goes LLPA pricing and walking through the door are these new pricing guidelines. These guidelines won’t keep higher credit score borrowers from qualifying for a home loan but just make them more expensive than they otherwise would be. That’s a fact.