There are changes to some mortgage fees next month

Washington, D.C. (CNN) Fees on mortgages backed by Freddie Mac and Fannie Mae are set to change next month, in a plan designed to make home ownership more affordable for more people. Generally, fees will go down for people with lower credit scores and will increase for people with higher credit scores.

But that doesn’t mean people with lower credit scores will pay less than those with higher credit scores. The changes mean that people with higher credit scores will still pay less based on lower risk to lenders, but having a lower credit score will now come with less of a penalty.

There are many variables that go into the price of a home loan, including the type of property you’re buying, how much money you’re putting down and how high or low your credit score is.

These variables help lenders — and state-backed Freddie and Fannie, which buy the vast majority of loans from lenders — price loans for risk. After starting with the base rate, or par, further price adjustments are added to take into account how risky the loan is for lenders to make.

Price hits like this are called a loan-level price adjustment, or LLPA, and have been around for a while and are occasionally updated. The price adjustments allow Freddie and Fannie to avoid being undercapitalized and overexposed to risk. Fannie and Freddie, which guarantee about half of the nation’s mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors.

Changes to the existing fee structure

Last year, the Federal Housing Finance Agency, which oversees Freddie and Fannie, increased fees on loans for which there is less need for government support, including some high-balance loans, vacation homes and investment properties.

In October, the FHFA announced it would eliminate upfront fees for certain borrowers and affordable mortgage products, which tend to be borrowers with limited assets or income, while introducing increases to other fees, particularly for most cash-out refinance loans.

Then, in January, FHFA announced additional updates to the fee structure for single-family homes that made the eliminated fees permanent and specified how other fees would increase.

“These changes to upfront fees will strengthen the safety and soundness of businesses by improving their ability to improve their capital position over time,” said Sandra L. Thompson, director of the FHFA at the time. “By locking in the upfront fee eliminations announced last October, FHFA is taking another step to ensure that the agencies advance their goal of facilitating equitable and sustainable access to homeownership.”

How the fee change works

For those with lower credit scores, the fee changes will reduce the penalty for having a low score. For those with higher credit scores, several price tiers have been put in place, which in some cases can increase fees.

For example, a buyer who made a 20% down payment with a credit score of 640 will see their fee drop 0.75% from 3% to 2.25% with the updates. Another buyer, also making a 20% down payment, who has a credit score of 740, will see their fee increase by 0.375%, from 0.5% to 0.875%.

The fee will still cost the home buyer with a lower credit score more.

A buyer with a credit score of 640 and a loan-to-value ratio of 80% will have a fee of 2.25%, while a buyer with a score of 740 will have a fee of 0.875%. The difference in estimated fees is about $4,000 more for a buyer with a credit score of 640 than for a buyer with a credit score of 740, based on a $300,000 mortgage.

The table outlining the fees based on loan-to-value ratio and credit score has been published by Freddie Mac and Fannie Mae.

Some critics say well-qualified buyers are already struggling to get into the housing market.

“Between the lack of supply, interest rates more than doubling in the past year and prices in most of the country remaining relatively flat, the barrier to entry has never been harder to pursue the American dream,” said Pierre Debbas, managing partner at Romer Debbas, a real estate law firm.

“The intent to provide access to credit to lower-income borrowers with lower credit scores and down payments is an important initiative to help expand the demographic that can acquire a home and theoretically build wealth,” he said. “But to do so at the expense of other consumers who are already struggling to enter the market is a mistake.”

But that criticism is misplaced, said Jim Parrott, a nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors, who added that it “conflates two separate, largely unrelated features of pricing for the government-sponsored enterprises.”

In a blog post, Parrott explains that the increase in fees for vacation homes and subprime loans allows Freddie and Fannie to reduce fees for some other buyers.

He also points out that the proposal that the fees are lower for those who make a smaller advance payment misses a critical point. Any loan with less than a 20% down payment must have private mortgage insurance.

“So those who put down less than 20% pose less risk to the GSEs and should pay less in fees to the GSEs,” Parrott wrote.

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