Does Having A Good FICO Score Make Buying A Home More Expensive?
The short answer is yes, but not as bad as most people are claiming it to be. So in the long run, it will generally cost you a few hundred dollars up front but no additional costs for the entirety of the home. This new action signed by the current administration have approved new fee structures in the Loan-Level Pricing Adjustments or LLPA’s which are paid at the closing table as additional closing costs. The way it will be calculated is by having a FICO score of 740 or higher will incur higher fees than present. Those with FICO scores of 639 or below will experience savings of thousands of dollars making it easier for them to enter the buyers market. The precise amount will be subject to change based on factors such as the purchaser’s credit score, down payment amount, and the property’s value.
How Does An LLPA Work Exactly?
A loan-level pricing adjustment (LLPA) is a fee that is risk-based and included in a home-mover’s closing costs. The fee serves to protect the lending institution against potential losses on a mortgage. To determine the LLPA, a variety of factors are taken into account, such as the loan-to-value (LTV) rate and the credit score of the borrower. While it is possible for a buyer to pay the LLPA upfront, most choose to have the fee added to their mortgage payments, as the cost per month is relatively negligible. This fee was implemented in April of 2008 in response to the financial crisis and does not apply to mortgages backed by the Federal Housing Administration (FHA), Veterans Affairs (VA), or the US Department of Agriculture (USDA).
The New Pricing Plan After May 1st, 2023
Fannie Mae and Freddie Mac, both of which are overseen by the Federal Housing Finance Agency (FHFA), have decided to modify the framework utilized to compute LLPA charges for prospective homeowners. This alteration will affect any loan that these two organizations back, representing roughly 60% of the mortgage market, according to the Urban Institute. The objective behind this change is to make it easier for first-time buyers from less privileged communities to enter the housing market.
FICO figures reveal that the typical American credit score is 711. Those with top-notch credit scores – those above 720 – will continue to pay less than their counterparts with inferior ratings. However, individuals with credit scores under 680 will observe a decrease in the penalty starting May 1.
Those buyers most impacted are individuals whose credit scores range from 740 to 759 and have made a down payment of between 15-25 percent. These buyers will now face an LLPA of 1% of the market, as opposed to the previous rate of 0.25 percent. Buyers who stand to benefit the most are those whose credit score is below 639 and have made a down payment of between 95 and 97 percent. Home movers in this category will witness their LLPA decrease from 3.75 percent of the property value to 1.75 percent.
There has also been a minor adjustment to the threshold: while previously the lowest category was 620 and below, that number is now 639.
Examples Of New Costs
Suppose you have a credit score of 620 and decide to take out a mortgage on a $300,000 property, with a loan-to-value (LTV) ratio of 95% or higher. According to the new rules, you will have to pay an LLPA fee equal to 1.75% of the mortgage, which amounts to $5,250.
Compared to the previous system, this is a significant improvement for borrowers. Under the old rules, the same borrower would have had to pay an LLPA fee equal to 3.75% of the mortgage, or $11,250, which means a savings of $6,000.
However, if you have a credit score of 740 and take out the same loan, you will end up paying $375 more than you would have paid previously. This is because under the old rules, this borrower would have paid an LLPA fee of 0.25% on a 75% LTV loan of $300,000, which equates to $750. But with the new rules, this rate has increased to 0.375%.
My Final Thoughts…
While I find it good to welcome more buyers into the housing market, I also see a setup for failure as you are now keeping housing prices higher due to even further artificial demand. Most people can agree that housing is too overpriced in comparison to wage growth and home ownership is becoming an unrealistic possibility. Furthermore, sellers as of lately have been willing to pay for LLPA’s and other closing fees because their homes are getting higher than usual offers and sitting on market significantly longer.
