Tag: how to manage money

Are you one of those people who act financially responsibly – save money to buy a home, pay your bills on time, keep your credit score in a healthy range?

Then keep on reading!!

Because a new regulation by the current administration, which goes LIVE on May 1st, 2023, may punish you instead of rewarding you for being a financially responsible adult…

Mortgage borrowers with good credit will face higher costs under a new scheme from the federal mortgage associations Fannie Mae and Freddie Mac.

And I doubt you’ll hear about this new regulation in mainstream media.

In case you never heard about LLPA, it stands for Loan Level Price Adjustment Fee Matrix, which is an additional fee that lenders may charge on certain mortgage loans to offset the risks associated with those loans.

LLPA traditionally were used to reward people with higher credit score loans with better interest rates because these borrowers present lower risks to lenders… they have a history of paying their bills…

However, an unprecedented change to the LLPA fee matrix is to be enacted on May 1st, 2023.

Under the new fee matrix, borrowers with high credit scores will face higher mortgage fees than before and those with lower credit scores will face lower fees!!

In other words, if you’ve acted responsibly – were paying your bills on time, were not living beyond your means and have a fairly high credit score, you’ll be penalized by extra fees via the new LLPA.

It’s shocking. It’s unprecedented. It’s a clear case of wealth redistribution.

The good news is that the monthly fee increase in mortgage payments for most borrowers is not expected (for now) to be significantly higher.

For instance, according to David Stevens, a former federal housing commissioner, someone with a $400,000 loan and a 6 percent mortgage rate may have to pay about $40 more per month.

But an extra $40 per month means an extra $480 per year. And over the whole course of mortgage repayment, a homeowner would end up paying thousands of dollars more due to the fee shift.

In my opinion, regardless of what the additional mortgage amount is in terms of actual costs, it’s unfair that borrowers with extremely good credit are effectively being penalized while borrowers with lower credit scores are being rewarded.

And it doesn’t make any sense in terms of managing lenders’ risk!

Because lenders will significantly cut the fees for their highest-risk borrowers and increase fees in much better credit quality buyers!!

And while overall, lower-credit buyers will still pay more in LLPA fees than high-credit buyers, this latest change in the LLPA fee will give lower credit score / higher-risk borrowers a preferential treatment by enforcing higher-credit / lower risk borrowers to subsidy the them.

Here’re some more specifics for you:

Under the new LLPA rules, high-credit buyers with scores ranging from 680 to above 780 will see a spike in their mortgage costs – with applicants who place 15% to 20% down payment experiencing the biggest increase in fees….

LLPAs are upfront fees based on factors such as a borrower’s credit score and the size of their down payment. The fees are typically converted into percentage points that alter the buyer’s mortgage rate.

Under the revised LLPA pricing structure, a home buyer with a 740 FICO credit score and a 15% to 20% down payment will face a 1% surcharge – an increase of 0.750% compared to the old fee of just 0.250%….

Meanwhile, buyers with credit scores of 679 or lower will have their fees slashed, resulting in more favorable mortgage rates.

For example, a buyer with a 620 FICO credit score with a down payment of 5% or less gets a 1.75% fee discount instead of the old fee rate of 3.50% for that bracket.

So, the penalty for having a credit score under 680 is now smaller than it used to be.

While having a good credit score and putting more money for the down payment were strong factors that motivated people to act financially responsible, the government intention to “level the playing field” in the name of equity is decreasing this powerful reward for responsible behavior.

With this being said, remember that your loan will still cost more if you have a lower credit score. 

For instance, if you have a score of 659 and are borrowing 75% of the home’s value, you’ll pay a fee equal to 1.5% of the loan balance whereas you’d pay no fee if you had a 780+ credit score.

But before these new LLPA changes, you would have paid a whopping 2.75% fee. On a hypothetical $300k loan, that’s a difference of $3,750 in closing costs.

But that’s not all…

Lenders can charge higher interest rates to high-credit borrowers yet pay these costs for you (but the costs are still there, and still technically being paid by you over time in the form of higher interest rates).

Federal Housing Agency (FHA) Finance Director called it “another step to ensure that [Fannie Mae and Freddie Mac] advance their mission of facilitating equitable and sustainable access to homeownership.”

So, what do you have to keep in mind if you’re considering applying for a mortgage after May 1st, 2023, once the new Loan-Level Price Adjustment (LLPA) fees come into effect?

Here’re a few things to keep in mind:

1.   Shop around: It’s always a good idea to shop around for the best mortgage rates, and this is especially true now that LLPA fees are changing. Different lenders may have different fees and rates, so it’s worth exploring your options.

 2.   Improve your credit score: Unfortunately, if you have a good credit score, you may be subject to higher LLPA fees under the new rules. However, if you can improve your credit score before applying for a mortgage, you may be able to reduce the fees you’re charged.

 3.   Consider a larger down payment: Borrowers who can afford to make a larger down payment may be able to reduce the LLPA fees they’re charged.

For example, under the new rules, high-credit buyers with scores ranging from 680 to above 780 who put down 15% to 20% will experience the biggest increase in fees, so if you can afford to put down more than 20%, you may be able to avoid some of these fees.

 4.   Be aware of the long-term costs: While the increase in fees may not lead to significantly higher monthly mortgage payments for most borrowers, it’s important to consider the long-term costs.  Because even a small increase in monthly payments can add up over the course of a 30-year mortgage.

Overall, it’s important to carefully consider your options and understand the costs and fees associated with your mortgage before making a decision.

Let me know in the comments what you think about this new LLPA adjustment – always love to hear your point of view!

To your Health, Wealth and Freedom!

Millen Livis