BIDEN’S PLAN

Homebuyers with good credit scores will soon be facing higher mortgage fees as the Biden administration seeks to close the racial homeownership gap and get more first-time and low-income buyers through the door.

A new federal rule could raise the monthly mortgage payments of buyers with good credit scores by over $60 a month, while riskier borrowers will get more favorable terms because their fees will be reduced.

Starting in May, the current structure of the Loan-Level Price Adjustment (LLPA) matrix will be upended by the Federal Housing Finance Agency (FHFA) in the hope of addressing housing affordability challenges in the U.S.”

— Newsweek

WHAT IS THE LLPA MATRIX?

LLPA = LOAN LEVEN PRICE ADJUSTMENTS

When selecting a mortgage rate, you have options. Imagine interest rates on a scale of 1 to 10. 1 having the highest cost, and 10 having the largest credit back. Like a rebate. 5, being in the middle, has no cost, or no credit. The “par” rate would be considered 5% in this example.

Loan level price adjustments are impacted by the following:

Credit score

Down payment

Whether or not you’re a 1st Time Buyer

Income

Loan limits (by county)

Occupancy

Property Type

Debt ratios

For many years, the lower your score, the higher your fees. This is what makes FHA financing attractive. With FHA loans, the mortgage insurance has a fixed rate. For example, whether you have a 620 score or an 800 score, you pay the same rate for mortgage insurance. The debt ratio requirements are also the same when using FHA financing regardless of score, or down payment.

FHFA = Federal Housing Finance Agency supervises Fannie Mae and Freddie Mac. These rules apply to Conventional loans. For conventional financing up to the conforming loan limit, the minimum down payment is only 3%. For loan amounts exceeding the conforming loan limit, but not above the high balance limit for high cost areas is 5%.

The charts below shows, the higher the score, the lower the hit to the rate. Those with higher scores still have lower fees, but their costs are rising. This should have less of an impact as mortgage rates improve. The matrix shows that buyers are still incentivized to put more down.

LLPA Waivers:

For First Time Homebuyers with qualifying income less than or equal to 100% of the area median income (AMI) or 120% AMI in high cost areas, LLPAs will be waived. See below.

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Take a look below at the current LLPA matrix. With a credit score of 640, putting 20% down, you would take a 3% hit to your loan cost.

With a 740 score, your hit would only be 0.5%.

After May 1st, the 640 score will take a 2.25% hit instead. The buyer with scores greater than 740 will take a 0.875% hit. The cost is going up for people with credit scores over 700. This is exclusive to agency loans.

In my opinion, balancing the scale is long overdue. The number one problem with housing in America is affordability. Higher scores continue to be rewarded with lower cost loan, as they should be. To lower the cost for buyers with less means makes sense. The difference in the payment could make the difference in their ability to buy.

EXAMPLE:

$700,000 PURCHASE PRICE

$665,000 LOAN AMOUNT (5% DOWN)

FICO SCORE 640

FIRST TIME HOME BUYER WITHIN AMI LIMIT 

6.5% RATE WITH NO POINTS

$4203 PRINCIPAL AND INTEREST PAYMENT

WITH A 741 SCORE, THE RATE WOULD BE 6.375% WITH NO POINTS AND THE PRINCIPAL AND INTEREST PAYMENT IS $4149.

Buyers with higher scores still have better options. The argument is that those with higher scores are taking on greater costs to give buyers with lower scores a discount.

Thank you for taking the time to read my updates, your feedback is always appreciated. I am never too busy for your referrals, text intros work great!