Do new mortgage rules mean higher credit homebuyers pay more?
New rules on mortgage fees that may have some people with stronger credit scores paying more
Controversy is buzzing over new mortgage rules taking effect Monday: higher fees for homebuyers with good credit, and lower fees for people with lower credit. However, mortgage experts say that’s not the whole story.
HOUSTON - Controversy is buzzing over new mortgage rules taking effect May 1 that may mean higher fees for homebuyers with good credit, and lower fees for people with lower credit. But mortgage experts say that's not the whole story.
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We sat down with a mortgage expert with Bankrate to show you what the changes will look like.
Mortgage lenders Fannie Mae and Freddie Mac have new upfront loan fees that some say penalize buyers with higher credit scores and reward those with lower scores.
So let's break it down.
"That’s not really the case," explained Jeff Ostrowski, Senior mortgage reporter who analyzed the changes for Bankrate. "If you have a good score, you’re still paying less in fees than someone with a lower credit score. It’s just that the gap has narrowed a bit."
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In order to help shore up the coffers at Fannie Mae and Freddie Mac, which have been ailing since the Great Recession, the Federal Housing Finance Agency has created a new grid of 80 categories that set their upfront loan fees based on the borrower's credit score and down payment.
Let's say you have a fair credit score of 640 to 659 and make a 25% down payment on a home. You'll now pay a fee equal to 1.5% of the loan, down from 2.75%. On a $350,000 loan, that's a savings of $4,375.
"And that’s going to be amortized over the life of the loan," said Ostrowski.
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A borrower with a higher credit score of 740 to 759 who makes a 25% down payment, will pay a fee of 0.375% of the loan, up from 0.25%. On a $350,000 loan, that's an extra cost of $438.
"Now the grid goes up to 780, so these new fees really reward borrowers that have scores of 780 or higher. They pay the lowest fees by far," said Ostrowski.
Some homebuyers have asked whether it pays to have a lower credit score.
Ostrowski says no. He says the bottom line is that borrowers with strong credit scores still pay less in fees than borrowers with fair credit scores.
"Still, you’re being rewarded for having the highest credit score and making a bigger down payment, and being penalized for having a lower credit score and making a lower down payment," he said.
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These changes affect conventional loans for borrowers with solid credit histories.
They do not affect borrowers taking FHA, VA, or USDA loans. Federal Housing Authority and some Veteran Affairs-backed home loans allow lower credit scores than conventional mortgages and are easier to qualify for. U.S. Department of Agriculture-backed loans have stricter income limits and require borrowers to live in an eligible rural area.