Lending a Hand
SOME big changes to mortgage costs! Fees and costs of most mortgages are increasing this year, thanks to a new update from the FHFA (Federal Housing Finance Authority). After a year when we saw rates increase at a historically fast pace it feels like poor timing, to put it lightly.
What does this mean?
Mortgage rates are generally determined by the risk associated with a specific transaction. Fannie Mae and Freddie Mac are the two “agencies” that govern and guarantee almost all mortgages in the US, and their mechanism to adjust for risk in an individual transaction are referred to as LLPAs (Loan Level Pricing Adjustments). LLPAs are typically based on details such as credit score, loan-to-value ratio, occupancy (owner occupied, 2nd home, investment) and now also a borrower’s debt-to-income ratio, among others.
Who does this apply to?
Since Fannie Mae and Freddie Mac guarantee the majority of mortgages, these changes will affect almost every new mortgage written. Loans not affected by these changes are FHA or VA loans, in addition to jumbo loans and some specialty or alternative products.
When does this take effect?
These changes will apply to any loan guaranteed by Fannie and Freddie starting May 1, 2023… this means lenders will need to implement the changes (and the impact to costs and interest rates) in March or April. Every lender will make the formal decision on their own, but since the changes apply to loans delivered to the Agencies on or after that date, they will need to be applied in advance of the date itself!
So, what changed?
Without getting lost in the details – the level of pricing adjustments applied to certain loan characteristics have shifted. In some cases, this results in lower costs/better rates for some borrowers, but the majority will see a negative impact, meaning higher rates and/or costs.
A few big take-away’s:
⇒There are new credit score bands at 760+ and 780+. In the past, there was no difference in rate with a credit score above 740, regardless of how high the score was. Now, borrowers above a credit score of 760 or 780 will see lower costs compared to the prior 740+ threshold.
⇒There is also a new charge for debt-to-income ratio’s over 40%
⇒Historically, debt-to-income (DTI) ratio’s have never impacted the rate offered to a borrower. With this change, if total debts account for more than 40% of a borrowers total gross income, there will be higher costs associated.
⇒Cash-out refinances will become significantly more expensive!
How will these costs be reflected?
The increased cost won’t necessarily come out of pocket for most borrowers. Lenders can (and will) offer higher rates to cover the increase in “costs”. The costs are still there, being paid over time in the form of the higher rate, unfortunately.
Why is this happening?
Well, there is no clear answer, but we can speculate. The agencies, being tasked with maintaining the health of the real estate and mortgage industry have likely seen some changes in the market that forced their hands. One example is related to property values, which have skyrocketed over the last 2+ years… and heading into a potential recession this year, there’s no way to forecast what property values will do in the future. It seems as though the objective, in part, is to place limits on a homeowner or borrower’s ability to tap into their existing equity. Without these restrictions, there is the potential for over borrowing when adjusting for declining home values. Whether home values will decrease or not is a topic in and of itself… personally I don’t believe they will, and if they do, only by a very small percentage.
In some ways, higher credit score borrowers are now being rewarded for their financial responsibility. As costs associated with loans written to borrowers with credit score above 760 and 780 will be slightly lower.
The additional costs for borrowers with DTI above 40% is very controversial and I expect there to be some pushback against this in the coming weeks/months. This is an example of another risk mitigation strategy, potentially limiting the buying power of some borrowers as a protective measure for both the individual borrowers and the industry as a whole.
What can I, as either a homebuyer or homeowner do about this?
If you are expecting to purchase or refinance a home this year, the best thing to do is to get in touch with a lender (me!) as soon as possible. Getting all details together and doing a deep dive on the numbers as a way to plan for any changes will go a long way towards making your home search or refinance process much smoother and more successful. As lenders, our hands are tied by the governing agencies, so all we can do is provide a greater level of value in the form of information and good planning practices. Optimizing credit scores and even DTI in advance will absolutely help minimize or eliminate some of the increased costs or rates that we will be able to offer going forward!
If you are in a position to buy or refinance a home this year, feel free to reach out at any time and we can evaluate things at a high level and make recommendations specific to your individual situation!
Anthony Lapolla is a seasoned mortgage lender with over a decade’s experience in qualifying his clients at their best rates during real estate purchases. He and his team have built a foundation throughout Boston and its surrounding areas around integrity and transparency that feels like “home” the moment you meet him. Anthony and is wife Meaghan have been married for 5 years, live in Peabody and welcomed their first child in July ’22!