The landscape of mortgage costs in the United States has just undergone a significant transformation. In some instances, these alterations are quite dramatic, both positively and negatively. We’ll explore these changes, helping you understand what they mean for you.
Understanding Mortgage Fees and Costs:
Mortgage fees, or Loan Level Price Adjustments (LLPAs), are charges set by Fannie Mae and Freddie Mac (collectively known as “the agencies”). These entities guarantee a majority of new mortgages in the country. LLPAs are determined based on factors such as your credit score, loan-to-value ratio, occupancy (owner-occupied vs. non-owner-occupied properties), and most recently, your debt-to-income ratio.
Affected Lenders and Loans:
The changes apply to any loan guaranteed by the agencies, regardless of the lender. This encompasses most loans in the United States. Exceptions include FHA/VA loans, certain jumbo and specialty products, and non-conforming loans not backed by the agencies (e.g., jumbo loans from retail banks or credit unions).
These modifications are applicable to loans guaranteed by the agencies starting May 1st, 2023. Many lenders will begin implementing these changes in March and April.
- Reduced penalties for credit scores under 680: Borrowers with lower credit scores will still face higher costs, but the penalties are now less severe. For example, with a 659 credit score and a 75% loan-to-value ratio, you would now pay a 1.5% fee on the loan balance, compared to a previously hefty 2.75% fee. On a $300k loan, this equates to a $3,750 difference in closing costs.
- Higher costs for borrowers with higher credit scores: Those with better credit scores will generally pay slightly more under the new structure.
- New debt-to-income (DTI) ratio charges: This controversial addition will impact many borrowers, as income calculations can be subjective and debt calculations can be adjusted through advanced planning or debt consolidation. If your DTI exceeds 40% and you’re borrowing more than 60% of your home’s value, you’ll pay more.
Other Notable Changes:
- Introduction of new credit score bands at 760+ and 780+
- Greater differentiation in high-balance vs. non-high-balance ARM loans (though most ARMs are not done through the agencies)
- Several modifications to 2-4 unit property LLPAs
- A new generic LLPA for subordinate financing (e.g., a second loan or HELOC)
- Significant fee increases for many “Cash-Out” loans
How to Find Specific Changes:
If you have a loan in process or will soon, these changes may not apply to you, as most lenders won’t implement them immediately. For clarification, consult your local My City Mortgage originator.