The relationship between credit scores and mortgage rates has historically been straightforward: the higher your credit score, the lower your mortgage rate. When I’ve applied for mortgages or refinanced in the past, lenders would always inquire about my credit score, and if it was below 720, they would direct me elsewhere.
Before the 2008 financial crisis, having a credit score of 720 or higher guaranteed you the best mortgage rates and lowest fees. But post-2012, to secure these benefits, a credit score of 800 out of 850 was often necessary.
I set a personal goal to achieve an 800+ credit score to save money. On September 6, 2013, I reached that mark, maintaining it ever since. This strong credit rating enabled me to buy a new property in 2014 at a competitive rate and refinance in 2018 at an even lower rate. I also purchased my forever home in mid-2020 with a 7/1 ARM at a mere 2.125% rate. Being a responsible borrower truly paid off.
However, imagine a scenario where higher credit scores led to higher fees. This could discourage responsible borrowing and invite riskier buyers into the market, increasing the potential for another housing crisis.
This alarming thought led me to a startling discovery: the Federal Housing Finance Agency (FHFA) has adjusted the fee structure for loan-level price adjustment (LLPA), leading to different costs for different borrowers.
For example, before May 1, 2023, a borrower with a credit score of 740 or higher would pay a 0.25% fee on a $500,000 loan, or $1,250. After May 1, that same borrower could pay as much as 0.375% – or $1,875.
This change in fees is substantial. In another case, homebuyers with credit scores between 740 to 759, considered “very good,” will now face an LLPA of 1% compared to the previous 0.5% for a $500,000 home purchase. That’s a fee increase from $2,500 to $5,000.
These aren’t just numbers; they represent significant additional costs for borrowers. And if a homebuyer isn’t directly paying a higher mortgage fee, it may translate into a higher mortgage rate. Lenders need to make their money somehow, so don’t be deceived by “no-cost refinance.”
The FHFA has also decided to lower fees for people with lower credit scores. From May 2023, a homebuyer with a credit score between 640 to 659 and a 5% down payment will see a reduced LLPA fee from 2.75% to 1.5%. That’s a reduction from $13,750 to $7,500 on a $500,000 home.
This adjustment seems to be an attempt to balance the market, rewarding or easing the burden on lower credit score potential homebuyers. However, it also means higher credit score borrowers now bear the brunt of these adjustments.
The majority of mortgage originations post-2010 have come from borrowers with high credit scores. With home prices booming, wealth has predominantly accumulated among those with higher credit scores, leaving those with scores under 660 largely excluded from the housing market since 2009.
The federal government seems to have aimed to address this imbalance, but such changes might have further effects. Higher fees for top credit score borrowers may lead to tougher negotiations and longer closing times, potentially causing more deals to fall through. Moreover, it could impact the real estate industry with lower commissions and strained relationships between lenders and borrowers.
One unexpected consequence of these changes might be the disproportionate negative impact on Asian Americans, who tend to have higher average credit scores. A study found that Asian Americans have higher mortgage denial rates compared to White Americans, despite having higher median income. The new fee structure might further complicate this issue.
For those affected, understanding these changes and negotiating effectively with lenders, real estate agents, and sellers is crucial. Maintaining a strong credit score is still vital, and being treated unfairly should never be tolerated.
Personally, the new challenges don’t deter me. I believe in working hard, earning more, increasing my credit score, and managing my debt responsibly. Having a higher credit score has made life easier, and I’m proud to have contributed to the economy.
Since arriving in America in 1991 and building my fortune, I’ve seen the power of real estate, making up about 50% of my passive income. Despite the new mortgage fees, helping others achieve the American dream feels like an honor.
The recent changes to mortgage fees may seem substantial, but understanding the implications, staying informed, and negotiating effectively can lead to success in this ever-evolving market. It reinforces the timeless truth that financial responsibility still pays off.