"They just made it just a tad bit worse": What new rules on mortgage rates mean for those with high credit scores

RICHFIELD, Minn. -- As if the housing market wasn't stressful enough.

The Broyko family was able to sell their Richfield home in a matter of days, but the search for a new home is nearing six months.

"I feel like the market is still really hot for how high the interest rates are, which is kind of absurd to me, because you'd think it would've slowed down and buyers would be taking more time with it," Emily Broyko explained to WCCO News. "But there are a lot of buyers out there."

According to Experian, prospective buyers in Minnesota have averaged a FICO score of 742 in 2022 and 2021 - the highest average among all states - and those higher scores have typically rewarded buyers who pay bills on time with more affordable interest rates and closing costs. On the flip side, those with lower credit scores have needed to pay more to compensate for the lender's higher risk in approving that loan.

Come May 1, however, new rules from federal regulators will tweak that formula by adjusting Loan Level Price Adjustments (LLPAs) that are set by underwriters Fannie Mae and Freddie Mac. 

According to CBS News Boston:

For instance, starting in May a homebuyer with a credit score between 640 to 659 - considered "fair" - and who has a down payment of 5% will incur an LLPA of 1.5%. Prior to the change, 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, homebuyers 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 its announcement earlier this year, the Federal Housing Finance Agency (FHFA) said the changes are designed to level the playing field and empower buyers from marginalized communities to compete in the hot market.

Danny Kovack, a Minnesota-based mortgage broker, told WCCO News the LLPAs will mean buyers with higher credit scores could be paying more in closing costs than they would have before, but it's still better than having a lower score.

"Someone with a lower credit score is paying more to get the same rate as someone with a good credit score - still," Kovack said. "It just used to be they were paying a lot more. They've made it closer to those with good credit. The better credit score, you're getting a way better deal. They just made it just a tad bit worse for you."

Kovack added the new LLPAs will not apply to FHA, VA or USDA loans, and buyers should continue to pay their bills on time and not try to purposely lower their credit scores.

"The lower score makes it harder to get approved. You need stronger things like more money in the bank, higher income to offset for a lower credit score."

For Emily Boyko, she said she knows she doesn't get a say in the matter, and she'll just have to play ball.

"I don't think anyone is every prepared to pay more, but it's unfortunately our society, and the world is moving forward right now."