Recently there has been a lot of discussion in the news about changes made by the Federal Housing Finance Agency (FHFA) regarding interest rates. Fannie Mae and Freddie Mac have been charging Loan Level Price Adjustments (LLPAs) for many years. Effective on May 1st, loans that are guaranteed by Fannie and Freddie have had pricing adjustments. Several of those changes affected people with good credit scores and the news has been saying that those with good credit will get worse rates to help those with poor credit. This is not necessarily true. Let’s break it down.
So what changed? There are new credit score bands for those with scores at 760+ and 780+. In the past, the highest band was 740. There are changes to those buying a 2-4 unit home and those with subordinate financing (second mortgages). There are changes to those getting cash out refinances will also have new fees with the new LLPA’s.
Because these are effective on May 1st, lenders have already adjusted pricing to reflect these changes. Most lenders started charging the new rates with loans closed in April. There is one change that has not taken effect yet – FHFA wants to add a .375% to those with a debt to income ratio over 40%. This has been delayed until August 1, 2023 and many are hoping it goes away completely. This will be more difficult for lenders to deal with as income can change during the processing of your loan.
For those with income under the median income limits, there isn’t a hit at all. Meaning those in the Minneapolis St Paul metro area that have income under $94,600 will not have any adjustments to the interest rate. So if you are under that income limit, you want to make sure your lender is aware. Most of us would use a Home Ready or Home Possible program and then you do not have the pricing adjustments.
To find out how this affects you, check with your loan officer or give me a call. There may be times where we tell you to put more or less down to get the best pricing. Or maybe it makes more sense to use FHA financing – FHA and VA loans do not have these adjustments. And with FHA lowering mortgage insurance this year, it may make more sense to use FHA financing.
The most important thing to take away from this is it’s still going to cost you more if you have lower credit scores. For example, the add on for someone with a 740 score putting 10% down is .75%, but if your score is 680, the add on is 1.50%.
Make sure you talk with your loan officer – our job is to help you get the best mortgage for your situation. It may not always be the lowest rate, there are many factors that go into your loan. How long you will be in the home? Are you going to refinance in the next year or two assuming interest rates drop like we expect them to? It may not make sense to pay points depending on how long you are going to keep your mortgage. As we have said lately, you marry the house, you date the interest rate!