Mortgage fees have changed for home buyers, here's what you need to know
BOSTON - If you're buying a home, you need to be aware of a little-known mortgage fee that's changed based on your credit score.
It started on Monday, May 1. Some people with higher credit scores may actually end up paying a higher fee while those with lower scores will pay less.
The new mortgage fee structure is meant to help people who historically have struggled to purchase their first homes, such as lower-income households that may have lower credit scores, by reducing their closing costs, Zillow economist Orphe Divounguy told CBS MoneyWatch.
It's called the loan-level price adjustment (LLPA) fee.
These are fees charged by Fannie Mae and Freddie Mac that are chiefly based on a homebuyer's credit score and the size of a down payment. They often are rolled into your closing costs, which can be an overlooked factor by some people in buying their first home.
The updated fee only impacts home buyers.
"It's really a big change," mortgage loan officer and credit score expert Al Bingham told WBZ-TV. "It's going to hit the consumer hard when they go to apply for a mortgage."
For instance, a home buyer with a credit score between 640 to 659 - considered "fair" - and who has a down payment of 5% will now incur an LLPA of 1.5%.
Prior to the change on May 1, the fee for this group of buyers was 2.75%. That means someone purchasing a $200,000 home would pay an LLPA fee of $3,000 under the new structure, down from $5,000 previously.
But some purchasers won't get as good deal as they did before.
For instance, home buyers with credit scores of 740 to 759 - considered "very good" - and putting 20% down will face a new LLPA of 1%, compared with 0.5% previously. For the purchase of a $200,000 home, that means the fee will double to $2,000.
In other words, the fees have been cut for many types of borrowers with lower credit scores and raised for those with higher scores, meaning that the spread between the two types of borrowers is now narrower.
But, the changes are complex and don't uniformly increase LLPAs for people with high credit scores. Some people with good credit scores will see no change, while a few types of borrowers with high scores could see a slight improvement. For instance, buyers with a credit score of above 780, considered excellent, and who make a down payment of 5% will see their LLPA decline by 0.625 percentage points.
"Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less," said Federal Housing Finance Agency (FHFA) director Sandra L. Thompson. "The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment."
"The bottom line is if you have a higher credit score, you will pay less than someone with a low credit score," Divounguy said.
CBS MoneyWatrch's Aimee Picchi contributed to this report.