Mortgage fee structure for some homebuyers is changing this month. Here's how.
A little-known mortgage surcharge is getting an overhaul on May 1 that could impact home buyers in very different ways, potentially helping those with lower credit scores by lowering their costs. But some borrowers with stronger credit scores could end up paying more.
The revamp of the so-called loan-level price adjustment (LLPA) fee is causing consternation among some mortgage professionals, who have protested that buyers with high credit scores will effectively be underwriting those with low scores. But that isn't the case, other experts say.
The backlash to the overhaul spurred the Federal Housing Finance Agency, which levies the fees, to issue a statement this week to call such concerns "a fundamental misunderstanding." Sensitivity about the change in fees may be heightened given the affordability crisis in the real estate market, which is pricing many buyers out of buying a home.
What is the purpose of the fee change?
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.
"Housing affordability remains the biggest challenge for home shoppers today," he noted. "Some borrowers will pay slightly lower fees, and some other borrowers will pay slightly higher borrowing costs than they did before."
What is a loan-level price adjustment 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.
LLPAs were introduced around the time of the 2008 financial crisis to help offset the risks borne by Fannie and Freddie Mac, the federally backed mortgage institutions overseen by the Federal Housing Finance Agency (FHFA).
"It's a way of insuring the taxpayers against borrowers defaulting on their loans," Divounguy said.
The updated fee only impacts homebuyers, and doesn't have any impact on people who already have a mortgage, or who own their homes outright. It also won't impact the roughly 40% of mortgages that aren't backed by Fannie Mae or Freddie Mac.
What is changing on May 1?
The FHFA is recalibrating the fee structure for LLPAs starting on May 1 by lowering fees for some borrowers and hiking those for others.
"The spread of fees between low and high credit score borrowers won't be as big," Divounguy said.
For instance, starting next month 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.
Why is the change drawing criticism?
Some experts believe the new rules are unfair because they effectively penalize buyers with higher credit scores, while others are worried the change could have a potentially chilling impact on purchases.
The National Association of Realtors has come out against the overhaul, arguing that the new fee structure could hurt some buyers at a time when affordability remains challenging.
However, 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 downpayment of 5% will see their LLPA decline by 0.625 percentage points.
That could have an "unintended consequence," noted Rajiv Sethi, a professor of economics at Barnard College and Columbia University, in a blog post. "Those with reasonably high credit scores and substantial wealth [could] choose to lower their down payments strategically in order to benefit from lower fees," he wrote.
What does the the government say?
FHFA director Sandra L. Thompson said in a statement on Tuesday that the fee change is being misinterpreted and that the new payment structure is part of an overhaul that started in 2021 partly as a way to "maintain support for purchase borrowers limited by income or wealth."
"Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less," she said. "The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment."
So are home buyers with higher credit score buyers actually paying more?
No, because those with higher credit scores are still paying less than those without strong scores, experts say.
"Having a good credit score continues to confer an advantage under the new fee structure, although to a diminished degree at some levels of the loan-to-value ratio," Sethi noted.
But, as noted above, 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.
Should I lower my credit score to get a cheaper fee?
One media report cited an unnamed expert advising people to lower their credit scores to get a better fee, but that's terrible financial advice, experts say.
First off, people with higher credit scores are still paying lower fees, so it doesn't make sense to damage your credit score. Second, that can ruin your prospects of getting better rates for other loans, such as auto loans or credit card rates.
"The bottom line is if you have a higher credit score, you will pay less than someone with allow credit score," Divounguy said.