Starting May 1, 2023, some borrowers will pay more for their mortgages thanks to a new rule from the Federal Housing Finance Agency regarding loan-level price adjustments, or LLPAs.
The changes will update the current fee structure on most loans originating from mortgage lenders in the US.
- Borrowers getting a conventional mortgage are subject to a new pricing structure starting May 1, 2023.
- Fees are dropping for some borrowers making lower down payments, while rising for those putting more down higher down payments.
- Industry leaders have pushed back against these new rules, citing both affordability issues for borrowers, and compliance concerns for lenders.
- New structure makes mortgages cheaper for some and pricier for others.
What are LLPAs?
Loan-level price adjustments are upfront fees that the government-sponsored enterprises Fannie Mae and Freddie Mac charge on the loans they purchase. These fees are taken as a percentage of the loan amount and vary based on the borrower’s credit score, down payment, and other loan features.
Most borrowers pay LLPAs in the form of a higher mortgage rate, with riskier borrowers paying more than those with high credit scores and large down payments.
What’s changing on May 1?
New mortgage pricing structure
May 1 is the official implementation date for the FHFA’s new LLPAs, though many lenders have already started using the new pricing.
The changes will impact any borrower getting a conventional mortgage backed by Fannie Mae or Freddie Mac. Government-backed loans (like FHA mortgages), jumbo loans, and other non-conforming loans are not impacted.
Exactly how much you’ll pay under the new pricing structure depends on your credit score and how much you put down.
In many cases, borrowers will be charged higher fees than they previously would have paid. A borrower with a 700 credit score and a 20% down payment previously would have paid an upfront fee equal to 1.25% of the loan amount — $3,750 on a $300,000 loan. Their fee has been raised to 1.375%, or a total of $4,125, on a $300,000 loan.
But some borrowers stand to benefit from this change thanks to a reduction in their fees.
For example, a borrower with a credit score of 780 or higher who puts 3% down will pay a fee equal to 0.125% of their loan amount. Before these fee changes, that same borrower would be charged a fee equal to 0.75% of the loan amount. On a $300,000 loan, that’s the difference between a $375 fee and a $2,250 fee.
You can see the entire new LLPA tables on Fannie Mae’s website. The old tables, which will no longer be used after May 1, can be seen here.
Not everyone is thrilled about the new pricing structure. In an April 20 statement, the National Association of Realtors asked the FHFA to walk back these changes.
“NAR continues to urge FHFA to rescind this unnecessary measure given their current financial strength and the affordability concerns plaguing homebuyers nationwide,” the statement said.
Are those with higher scores being charged more to pay for low-credit borrowers?
Some have argued that the FHFA uses fees charged to borrowers with high credit scores to subsidize lower fees for those with poor credit. But on Tuesday, FHFA Director Sandra Thompson released a statement calling this a “fundamental misunderstanding” of the fees and why these changes were made.
“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” Thompson said. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
While fees have generally been reduced for borrowers with lower scores compared to the old fee structure, those with low scores will still pay higher fees than those with high scores.
Thompson argues that it was due for an update because it’s been a while since the pricing structure has been reviewed. The new structure, she says, “will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.”
In some cases, borrowers with high scores and large down payments may pay more fees than borrowers with high scores and lower down payments. But as Thompson notes, borrowers with low down payments will also have to pay for private mortgage insurance, raising their overall costs.
The DTI fee change planned for August 1 has been scrapped
Another fee change was set to go into effect on August 1, but it was ultimately rescinded following pushback from the mortgage industry. This change would have added an upfront fee for some borrowers with a debt-to-income ratio (DTI) above 40%. DTI refers to the relationship between how much a person earns and how much they pay toward debts each month.
The FHFA announced on May 10 that the fee change had been rescinded. Over the past few months, many industry leaders have spoken out against this particular fee, urging the FHFA to reconsider.
Because a borrower’s DTI can fluctuate throughout the mortgage approval process, the scrapped DTI fee could have caused the pricing or rate a borrower was given to change during this time. This would have created compliance concerns for the lender and potentially delayed the closing process.
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