Your Credit Score and Mortgage Rates: A Changing Landscape
1. The Link Between Credit Score and Mortgage Rates
Typically, a high credit score translates into a low mortgage rate. I’ve often found this to be true when applying for a new mortgage or refinancing. If my score was below 720, I’d usually be told to explore other options.
Before the 2008 financial crisis, a score of 720+ was synonymous with low mortgage rates. Post-2012, however, the requirement shifted to a minimum score of 800 out of 850 for the best rates.
2. My Journey to 800+ Credit Score
To save money, I took measures to reach an 800+ credit score, achieving it on September 6, 2013. Maintaining this score allowed me to buy property at competitive rates in 2014 and refinance at even lower rates in 2018. By mid-2020, I secured a forever home with a 7/1 ARM at 2.125%. Being financially prudent has been rewarding.
But what if the rules were different, and higher scores led to higher fees? Such a change could lead to irresponsible borrowing and an increased risk of another housing crisis. Though this sounds negative, there may be some unexpected benefits.
3. Recent Changes: Higher Credit Scores and Higher Mortgage Rates
The Federal Housing Finance Agency (FHFA) has recently altered the fee structure for loan-level price adjustment (LLPA), increasing costs for some and lowering for others.
Before May 1, 2023, a credit score of 740+ on a $500,000 loan meant a 0.25% fee. After that date, this fee rises to 0.375%, or $1,875. This is a significant 50% increase.
For homebuyers with credit scores between 740 to 759, the new LLPA will be 1%, doubling the fee from $2,500 to $5,000 for a $500,000 home purchase.
4. If Not Higher Fees, Then Higher Mortgage Rates
If a homebuyer doesn’t pay a higher mortgage fee upfront, the cost will manifest as a higher mortgage rate. A 0.25% rate difference can be consequential. Shopping around for mortgages, I found that 0.25% is often the largest discount I could get from competing lenders.
5. Lower Credit Scores May Mean Lower Mortgage Fees or Rates
The FHFA is also lowering fees for individuals with lower credit scores. Starting May 2023, a buyer with a credit score between 640 to 659 will pay a 1.5% LLPA fee, down from 2.75%. On a $500,000 home, this would reduce the fee from $13,750 to $7,500.
6. Trends and Government Action
Since 2010, mortgage originations have primarily come from those with 760+ credit scores. Given the wealth disparity, the federal government decided to restructure the fees to promote equitable access to homeownership.
7. Implications of Fee Changes
High credit score homebuyers may now negotiate harder with lenders, creating further stress on the industry. Moreover, increased negotiation may lead to longer closing times and a higher likelihood of deals falling apart.
If lower mortgage fees attract more buyers, it could lead to increased home prices, enriching existing homeowners.
8. Unintended Consequence: Impact on Asian Americans
One potential unintended result of the new policy is the negative effect on Asian Americans, who typically have an average credit score of 745. The subsidy might appear unfair, especially as Asian Americans face higher mortgage rejection rates.
9. Solutions for High Credit Score Individuals
For high credit score buyers, negotiation is key. Borrowers still get the best rates, just with slightly less advantage. For Asian Americans seeking to buy a home, it might be wise to aim for a 760-800+ credit score.
10. Personal Reflections
While the new changes present challenges, I’m ready to work harder to continue being financially responsible. Real estate has been a significant source of passive income for me, and I want others to experience similar freedom.
In conclusion, the change in mortgage fee structure feels like an opportunity to help others attain the American dream. While the additional costs are noticeable, the overall impact on those who have built substantial homeowners’ equity may be minimal.
What are your thoughts on these recent changes? Share your credit score and insights below:
[ ] 800 or higher [ ] 720 – 799 [ ] 680 – 719 [ ] 600 – 679 [ ] < 600
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