New mortgage structure is in place for various FICO scores beginning May 1st.
Beginning May 1, 2023, the new Loan-Level Price Adjustment (LLPA) Matrix implemented by Fannie Mae and Freddie Mac may lead to increased costs for mortgage borrowers with high credit scores. Conversely, those with lower credit scores will enjoy reduced fees. This change has been described as “unprecedented” by David Stevens, a former federal housing commissioner and former CEO of the Mortgage Bankers Association, who also noted that mortgage companies and CEOs were taken aback by the decision.
The effect on monthly mortgage payments is anticipated to be minimal for the majority of borrowers. For instance, a borrower with a $400,000 loan at a 6 percent mortgage rate could experience an increase of roughly $40 per month. This increase equates to an extra $480 annually, which could accumulate to thousands of dollars over the mortgage’s lifespan.
Critics claim that penalizing borrowers with excellent credit while offering better terms to those with lower credit scores is unfair. Stevens referred to this change as a “significant cross-subsidy pricing change.”
Although the gap between borrowers with different credit scores will shrink, those with lower scores will continue to pay higher LLPA fees than borrowers with higher scores. Mortgage costs will rise for borrowers with credit scores ranging from 680 to above 780, particularly for those making a 15% to 20% down payment.
LLPAs, which are upfront fees influenced by factors like credit score and down payment size, are converted into percentage points that impact the mortgage rate. A home buyer with a 740 FICO credit score and a 15% to 20% down payment will now be subject to a 1% surcharge, a considerable increase from the previous 0.250% fee. On the other hand, buyers with credit scores of 679 or lower will enjoy decreased fees and more favorable mortgage rates.
Sandra L. Thompson, the Federal Housing Finance Agency Director, views this change as a means to foster equitable and sustainable access to homeownership.
