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Biden Administration's Change to Mortgage Fees Explained

You may have seen in the news lately a policy change enacted by the Biden administration that would in effect charge homebuyers with good credit more to help those with lesser credit afford to buy a home. Well, it isn't quite that simple. Let's break it down.

Beginning May 1st, some homeowners started seeing higher fees on their new mortgages while other saw reduced or eliminated fees. These changes, aka loan level price adjustments, or LLPAs, aren't new. They've been around since 2008 when the Housing and Economic Recovery Act established the Federal Housing Finance Agency, FHFA, who was made responsible for oversight of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

If you don't know about Fannie Mae and Freddie Mac, they provide ready access to funds that banks and mortgage companies use to give mortgages. They buy the mortgages from the lenders so lenders have more money to lend for more mortgages. They then bundle those mortgages into mortgage-backed securities, MBSs, which are sold to investors. They also help to stabilize the mortgage market which protects the real estate market during times of financial turmoil.

These LLPA fees began after the housing bubble burst and Fannie Mae and Freddie Mac realized they were over-exposed to risk. So they decided to increase fees on conventional mortgages, but rather than increase across the board, they increased based on risk related traits such as credit score and loan-to-value ratio (LTV), etc. These fees are often paid in the form of higher interest rates and can change a borrower's interest rate by 1% or more.

So what changed on May 1st? Loans affected by the new policy include conventional mortgages and refinances. This policy does not affect FHA, VA, or USDA loans. In hope of addressing housing affordability challenges, LLPA fees are now based on a new matrix which reduces fees for low credit score borrowers and those with lower down payments, while slightly increasing fees for buyers with good credit. Even with these adjustments, borrowers with more risk will still pay a higher rate than those with less risk. Do not think you'd be better off trying to get a mortgage with a low credit score. That's just not the case. Higher risk borrowers are still paying more for their loans than low risk borrowers. This change just made the gap smaller. These LLPAs are still assessed based on more than a dozen risk characteristics. Nearly every borrower is affected by at least one of these.

As you can see in the following chart, the fees you pay are still much less with higher credit scores.

It's only when we look at a chart showing the CHANGES in fees from the previous matrix that you see more benefit to borrowers with lower credit scores. Their fees improved over the past, but they did not improve over people with higher credit scores.

Just as before, if your goal is to pay the lowest possible interest rate for a mortgage, get your credit score as high as possible, pay off as much debt as possible, and put down as much down payment as you can afford. If you want to avoid paying these fees but have some of the risk characteristics, see if you can get an FHA, VA or USDA loan if possible. If you would like a referral to a fantastic mortgage lender, please give me a call.


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