Perhaps you’ve worked hard to improve your credit score because it can make all sorts of improvements to your financial situation. But then you’ve begun to hear that the government has changed some fees to increase costs for people with good credit scores.
What’s up with that? Well, that’s not exactly the case.
It is true that back in January the Federal Housing Finance Agency (FHFA) announced that beginning in May, mortgage fees on low-down payment loans would rise for some borrowers, while others with less-than-perfect credit would see costs go down. The fees, imposed by the government enterprises Fannie Mae and Freddie Mac, are designed to mitigate the risk of the borrower defaulting.
The fees are based on a percentage of the mortgage amount. People with high credit scores generally pay a lower rate than people with lower scores. That was the case before the change and FHFA says that’s still the case, even though there have been media reports to the contrary.
What’s changing is the gap between the rate for good credit scores and not-so-good scores has shrunk a bit. Someone with a 760 credit score putting down 5% will pay a fee of around 0.5% of the loan amount. Someone with a 660 credit score, making the same down payment and borrowing the same amount, would pay a rate of 1.625%.
FHFA Director Sandra Thompson issued a statement, with these bullet points, in an effort to explain the change.
Higher-credit-score borrowers are not being charged more so lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.
Some updated fees are higher and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.
Some mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk – despite many years passing since that framework was reviewed comprehensively. The fees associated with a borrower’s credit score and down payment will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.
Fees are paid by buyers making small down payments
Thompson says the new fee structure does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20% of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by Fannie and Freddie when considering a borrower’s total costs.
The changes also mostly affect borrowers who are making smaller down payments since the whole idea is to reduce the risk for the lender. Still, there are critics of the change.
David Dworkin, CEO of the National Housing Conference, says he thinks there should be more assistance to expand housing access but that he also believes the changes are not in keeping with the purpose of the fees.
“It’s no longer risk-based pricing, it’s income redistribution,” Dworkin told Forbes. “It’s picking who’s going to pay [more] so someone else’s mortgage is cheaper.”