The FHFA – the federal regulator for Fannie Mae & Freddie Mac -- set out new guidelines for interest rates and one part of the change has certain consumers with lower credit scores qualifying for lower interest rates than other consumers with higher credit scores. Someone with a 640 credit score in essence will qualify for about ¼% lower in interest rate on a 30 year mortgage than someone with a 740 credit score. This is flat-out wrong! How does this happen?
The FHFA issued new directives in a 2-part series. First in November 2022, the FHFA pulled back all additional fees – called loan level price adjustment fees – for first time homebuyers below 80% of the average medium income. There is a lot there.
Based on Average Household Income
For example, Salt Lake City, Utah has an average medium income of $102,200 while Chicago Illinois has an average medium income of $105,350. Take 80% of that income and it comes to $81,760 in Salt Lake City and $84,560 in Chicago. Every city and county has an average medium income. As long as the household income is below the average medium income, those prospective homebuyers will most likely qualify for the lowest interest rate and fees for a conventional (Fannie Mae / Freddie Mac) loan.
It doesn’t matter if their credit score is 700 or 640. As long as they meet the other loan qualifications, that prospective homebuyer will get a better interest rate and lower fee than someone with an 800 credit score. This is not a joke. Here is the link to the story that broke in from WBZ in Boston.
Click or copy and paste the following link -
Rewarding Bad Behavior
Why is this happening? FHFA put out a press release with the following:
FHFA launched such a review in 2021. The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field…
Basically, the objective was to force those with higher credit scores with higher rates and fees, and those with lower credit scores with lower interest rates and fees. In short, someone with a 640 credit score putting 3% down will qualify for a 6.25% interest rate. While someone with above average income and a 740 credit score will qualify for an interest rate of 6.50% -- a full ¼% high.
All to try and equal out the playing field. This will not end well.