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Everyone wants to get the lowest interest rate on a mortgage when they purchase or refinance a home. Many consumers think a minimum 720 credit score will qualify them for the lowest interest rate. More savvy consumers realize that that credit score requirement is 740. Now that number is being raised to 780 for the most popular mortgage loans. There are a few other new criteria in order to get the lowest interest rate. What does this mean for prospective home buyers and those looking to refinance their mortgage? Things are changing!

There are several new provisions for the conforming loan programs (Fannie Mae / Freddie Mac) that will start on May 1, 2023. They are as follows:

  1. New Credit Score Requirements
  2. Interest Rate Adjustments
  3. Debt Ratio Adjustments

New Credit Score Requirements

There are two substantial changes here. First, the minimum credit score to get the lowest interest rate has been raised from 740 to 780.

In addition, any credit score below 640 will no longer qualify for a conforming mortgage. It has been anything below a 620 credit score.

Interest Rate Adjustments

Interest rates for the most part are going to be higher. Here are some comparisons in interest rate with a 5% down and a 30 year mortgage:

                        Old Outline              New Outline

780                 No Adjustment          No Adjustment

740                 No Adjustment          1/4 % Higher            

700                 3/8 % Higher             3/8 % Higher

Debt Ratio Adjustments

For the first time, interest rates will be adjusted when the debt-to-income ratio is above 40%. For example, a person making $10,000 a month is putting down 5% and has monthly debt payments of $4,500 making his monthly debt-to-income ratio payments 45%. In this case, the person will have an adjustment in interest rate of about 1/8%.

If the monthly debt payments will be $3,500, making the debt-to-income ratio at 35%. In this case, there will be no interest rate adjustments.

There are several other adjustments that will be highlighted in future blogs. Everyone needs to understand that the cost of taking out a mortgage is going up.

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