Consumers with Higher Credit Scores Set to Pay Higher Interest Rates than Those with Lower Credit Scores - WHAT?!?

Fri, 28 Apr 2023 19:19:13 GMT

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 -

https://www.cbsnews.com/boston/news/mortgage-fee-changes-good-high-credit-scores/

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.

The Rules are Changing for New Mortgages!

Fri, 20 Jan 2023 21:25:50 GMT

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:

New Credit Score Requirements
Interest Rate Adjustments
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.

My Credit Plan Blog

Consumers with Higher Credit Scores Set to Pay Higher Interest Rates than Those with Lower Credit Scores - WHAT?!?

The Rules are Changing for New Mortgages!