High Credit Scores Will Mean Higher Mortgage Rates
The homebuying market is about to enter unknown territory as a new mortgage interest rate rule goes into effect on May 1st. Impending federal rules on mortgage rates will mean that buyers with high credit scores will actually pay interest rates which are higher than buyers with low credit scores. The rationale behind this plan is to allow more people with lower incomes (and lower credit scores) to become homeowners. This rule applies to mortgages backed by Freddie Mac and Fannie Mae. Yes. You read that right: buyers with low credit scores will pay significantly lower interest rates than buyers with high credit scores.
“Is it fair? I don’t necessarily think of it as being fair,” Virna Brown said of the change. Brown is a mortgage loan officer with Envoy Mortgage in Franklin, Massachusetts. “They’re redistributing the wealth with what they call an evening of the playing field for all the borrowers.”
The former CEO of the Mortgage Bankers Association, David Stevens, says this essentially subsidizes those with risky credit.
”It’s a bad policy step. It lacks integrity, and that’s not how we should be making housing policy right now... It should not include tinkering by a regulator for their own, social, or political purposes at a time like this,” Stevens said.
How stark will it be? A person with a 620 FICO score and a downpayment of 5% will get a one and three-quarter fee discount on a 30=year mortgage. But a person with a 740 FICO score or above, with a 15% -20% downpayment will see an increase of 75% in fees from the current levels. Further, this applies to people of all income levels.
“If you have a high credit score … you have to pay more and we’re talking about real money. This could be hundreds of dollars a month more, depending on the size of your loan, so it makes no sense,” Mitch Roschelle, of Madison Ventures, a multi-billion-dollar underwriter for mortgages and other financial transactions.
The Biden administration’s point of view is that it’s a push for affordable housing - that first time homebuyers of lesser means will benefit from this.
According to The Washington Times, Fannie Mae and Freddie Mac, the federally backed home mortgage companies, will establish the loan-level price adjustments (LLPAs).
Mortgage industry professionals believe this is an ugly surprise for homebuyers who worked years to build their credit.