If you’re in the process of buying a home or planning to do so in the near future, you should be aware of some important changes that are coming to mortgage fees in the US. Starting May 1st, 2023, the Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac will be different, affecting the costs associated with getting a mortgage for a vast majority of borrowers in the country.
In this blog post, we’ll go over the key information you need to know about these changes, including what they are, who they apply to, and when they take effect.
What are Loan Level Price Adjustments (LLPAs)?
LLPAs are fees that Fannie Mae and Freddie Mac, the two entities that guarantee a vast majority of new mortgages in the US, impose on borrowers based on certain loan features. These features include your credit score, the loan-to-value ratio, occupancy (owner vs. non-owner occupied homes), and most recently, your debt-to-income ratio. The goal of LLPAs is to ensure that borrowers who pose a higher risk to the agencies are charged more for their mortgages.
Who do these changes apply to?
These changes apply to any loan guaranteed by Fannie Mae or Freddie Mac, regardless of the lender. This means that the majority of mortgages in the US will be affected. Examples of loans that won’t be impacted include FHA/VA loans and certain jumbo and specialty products. Non-conforming loans, which are not guaranteed by the agencies, are also not affected by the changes.
When do these changes take effect?
The changes will take effect for loans guaranteed by the agencies starting May 1st, 2023. Many lenders will begin to implement the changes in March or April, so if you’re planning to buy a home during that time, make sure to ask your lender about how these changes will impact you.
What are the key changes?
The most significant change is the effective penalty for having a credit score under 680, which is now smaller than it was before. It still costs more to have a lower credit score, but the fees are less than they were under the previous structure. For instance, if you have a credit score of 659 and are borrowing 75% of the home’s value, you’ll pay a fee equal to 1.5% of the loan balance, whereas you’d pay no fee if you had a credit score of 780 or higher. Before these changes, you would have paid a whopping 2.75% fee. On a hypothetical $300k loan, that’s a difference of $3,750 in closing costs.
On the other hand, borrowers with higher credit scores will generally be paying slightly more than they were under the previous structure. The chart on the following link shows the differences.
Green and yellow cells show where things have become more affordable than they were, while orange and red cells indicate where things have become more expensive. All values refer to a percentage of the loan balance charged as an upfront fee.
Another notable change is the introduction of a new charge for debt-to-income (DTI) ratio. If your DTI ratio is over 40% and you’re borrowing more than 60% of your home’s value, you’ll be paying more. This change is controversial in many scenarios since income calculations can be somewhat subjective and debt calculations can be legitimately “tweaked” with some advanced planning and/or debt consolidation. Nonetheless, every loan guaranteed by the agencies has a DTI attached to it.
What Can Homebuyers Do to Prepare for These Changes?
If you’re planning to buy a home and apply for a mortgage after May 1st, 2023, it’s important to be aware of these changes and how they may impact your borrowing costs. Here are some steps you can take to prepare:
- Check Your Credit Score and History
Your credit score is a critical factor in determining your mortgage interest rate and the fees you’ll pay. If your score is below 680, you can expect to pay more under the new LLPAs. However, if you can take steps to improve your credit score, you may be able to qualify for better loan terms.
- Start by checking your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) to ensure they’re accurate and up-to-date. If you spot any errors or outdated information, you can dispute them with the credit bureau to have them removed. Additionally, consider paying down any outstanding debts or addressing any negative marks on your credit report to boost your score.
- Consider a Larger Down Payment
Another way to lower your borrowing costs is to make a larger down payment. When you put more money down upfront, you’ll need to borrow less, which means you’ll pay less in interest and fees over the life of the loan. Additionally, a larger down payment may help you qualify for a lower interest rate, as it shows lenders that you’re a less risky borrower.
- Get Preapproved for a Mortgage
Before you start shopping for homes, it’s a good idea to get preapproved for a mortgage. This process involves submitting your financial information to a lender, who will evaluate your credit score, income, and debt-to-income ratio to determine how much you can borrow and at what interest rate. Once you’re preapproved, you’ll have a better idea of your budget and can start house hunting with confidence.
- Shop Around for the Best Deal
Finally, when you’re ready to apply for a mortgage, be sure to shop around and compare offers from multiple lenders. Different lenders may have different fees, interest rates, and loan terms, so it’s important to do your research and find the best deal for your needs. Additionally, don’t be afraid to negotiate with lenders to see if you can get a better deal.
For more information on these changes and to speak with a local lender, click here or visit Mortgage News Daily.
The new Loan Level Price Adjustments imposed by Fannie Mae and Freddie Mac will have a significant impact on the costs of most new mortgages in the US starting May 1st, 2023. While some borrowers may see their costs decrease, others may experience an increase in fees and interest rates. As a homebuyer, it’s important to be aware of these changes and take steps to prepare for them, such as checking your credit score, making a larger down payment, getting preapproved for a mortgage, and shopping around for the best deal. By taking these steps, you can increase your chances of qualifying for a mortgage with favorable terms and avoid any surprises at the closing table.