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Those new mortgage fees? You may already be paying more.
But buyers with higher credit scores are not footing the bill for those with lower ones, industry experts say.
It will probably come as no surprise that residents of Massachusetts pay pretty steep mortgage payments. According to a report released on April 24 by online lending marketplace LendingTree, borrowers in Massachusetts paid the third-highest mortgage payments in the country in the first quarter of 2023, after Hawaii and California. Monthly mortgage payments averaged $3,021 in Massachusetts, $704 a month more than the national average of $2,317.
And, due to changes announced by the Federal Housing Finance Agency (FHFA) on Jan. 19, 2023, for single-family purchase and refinance mortgages sold to Fannie Mae and Freddie Mac, some borrowers may already be paying more.
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How much more? That depends on your credit score and the amount of your down payment. But while it’s been reported that those with good credit will be paying higher fees to subsidize those with poorer credit, mortgage experts say that’s simply not true.
“FHFA has recalibrated its pricing framework,” said Adam DeSanctis, a spokesman for the Mortgage Bankers Association. “Some borrowers with a higher credit score will see an increase in their pricing that’s higher than it was before. On the lower end of the spectrum, the fees are lower than they were before for some borrowers, depending on their down payment and credit score. But at the end of the day, if you have a good credit score, you’re not going to be given a higher rate than someone who has a lower credit score with the same down payment.”
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The fees in question, called Loan-Level Pricing Adjustments, are upfront costs Fannie and Freddie charge individual borrowers based on credit score, down payment, and other risk factors. While these fees have adjusted, low-credit borrowers still pay more than those with higher credit.
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“There’s a misconception that people with poorer credit are getting a benefit,” said Patti Lotane, mortgage loan officer at Cape Cod 5 in Chatham.
Lotane said that on a hypothetical $400,000 30-year, fixed-rate mortgage, a borrower who puts down 15 percent and has a 660 credit score would pay a mortgage rate of 6.875 percent at the prevailing rates on April 26. A borrower getting a loan with similar terms but who had a credit score of 760 would get a rate of 6.25 percent.
The adjusted fees may also benefit borrowers putting down less money, Latane said. “There are certain loan-to-value levels where the LLPA is lower for someone putting less money down on a purchase and higher for someone putting more down.” However, any borrower putting down less than 20 percent as a down payment on a conventional loan will be responsible for paying private mortgage insurance, which protects the lender against the riskier loan. So that would end up increasing the borrower’s total mortgage payment, she said.
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When FHFA announced the fee changes in January, the Mortgage Bankers Association issued a statement questioning whether those increases were wise given the affordability challenges and higher interest rates. The statement suggested that FHFA should be flexible with its May 1, 2023, implementation date. But that hasn’t happened, and mortgages originated since March have included the adjusted pricing. The National Association of Realtors released a similar statement on April 20.
The fee increases apply to loans sold to Fannie and Freddie on or after May 1, but since mortgages are packaged and sold in bulk on the secondary market, borrowers have actually been paying the fees for weeks.
“There’s a misunderstanding that a switch will flip on May 1 when in actuality, all the lenders I’ve talked to have been baking the fee increases in since March, if not February,” said Eric Rollo, managing partner and broker for The Agency in Boston.
The new fees announced in January follow a bump in the upfront fees charged by Fannie Mae and Freddie Mac for second-home mortgage loans announced by FHFA in January 2022. Effective April 1, 2022, those upfront fees for loans on second homes increased between 1.125 percent and 3.875 percent, depending on the loan-to-value ratio, and made financing a vacation home significantly more expensive.
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In order to dispel some of the incorrect information being disseminated, FHFA issued a statement on April 25 stating that “much of what has been reported advances a fundamental misunderstanding about the fees charged” by Fannie and Freddie.
“Higher-credit score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” the written statement said. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
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