My Credit Plan Blog

How Those Loan Fees Determine Your Interest Rate on a Mortgage

Fri, 05 May 2023 21:40:38 GMT

The FHFA has responded to criticism about their new fee structure. How does the fee structure for a conventional mortgage work and how does these changes impact a homebuyer’s interest rate?

LLPAs – also called Loan Level Price Adjustments

LLPAs have been in the news a lot lately. What are they and how do they work?

When you apply for a mortgage, there are several criteria the lender looks at to evaluate your credit worthiness. Different issues will increase your risk. Those risk factors (also called LLPAs) set out by Fannie Mae and Freddie Mac – the two biggest institutional mortgage agencies – are:

Credit Score
Down Payment
Living in the House or Rental Property, or even a Second Home
The Purpose of the Loan – Purchase a Home, refinance the Mortgage or take Money Out of the Equity
The Type of Home – Stand alone home, Condo, townhome, or Manufactured Home
Fixed or Variable Interest Rate
Property a Single Unit, a Duplex, a Tri-Plex, or a 4-Plex
Term of the Mortgage – 30 year, 20 year or 15 Year

All these factors will impact the interest rate on a regular conventional mortgage. How?

Since these issue are predetermined by Fannie Mae / Freddie Mac, the lender identifies all the appropriate risk factors before you close on the loan. The lender then knows what fees Fannie Mae or Freddie Mac is going to charge the lender -- and ultimately the borrower - for that loan. If there is 1.50% in loan fees (LLPAs) for example that need to be paid (in addition to the regular closing fees), the lender makes adjustments to the loan interest rate or fees to offset those LLPAs.

Those LLPAs fees are paid within a couple of weeks after you close on your mortgage. On a $400,000 mortgage, 1.50% is $6,000 in LLPA fees. The lender has to pay that money upfront. In turn, the mortgage lender will go back to the borrower and charge higher fees, or a higher interest rate.

If the lowest interest rate available at a particular moment is 5.00%, the lender will raise the interest rate to offset that 1.50% fees from Fannie Mae or Freddie Mac. The lender may raise the interest rate to 5.75%. The payment jumps $187 a month. The lender will recoup $187 a month to repay the $6,00 back.

This leads to another question. Once the $6,000 is paid, does the lender automatically lower the interest rate? No. The lender will continue to take that higher payment until the loan is paid off.

That is how LLPAs work.

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 Problems with Experian Boost

Fri, 29 Jul 2022 20:34:05 GMT

More and more consumers are seeing that they have to exit Experian’s Boost program because it is lowering their FICO® credit scores? Why?

Experian claims Boost is the consumer’s answer to raising their FICO credit scores. There are several problems to their claims. Let’s go through them one by one.

Boost only impacts Experian FICO Credit Scores

Experian Boost is Experian’s program to improve credit scores. Unfortunately, there are three major credit scores; the Experian Classic FICO Credit Score, the Equifax Classic FICO Credit Score, and the TransUnion Classic FICO Credit Score. They are used by all mortgage lenders, and most credit card and auto lenders.

Experian adds utility payments to a consumers Experian’s credit report. It does not impact the Equifax credit report and the TransUnion credit report. So, it only impacts one of the three major credit scores. What respectable program only impacts one of the three major credit scores? That’s a problem.

Failure to Analyze Your Credit Situation

Experian Boost simplies adds utility accounts to whoever signs up for its program. It adds several new utility accounts. What if you do not need them to improve your FICO Scores? Answer? You FICO Scores will then drop. There is no analysis on your credit report to see if that is what you need. Most will not see any good results for some time. Over a year or longer, the scores may start to improve.

For this reason, it is not worth simply throwing new utility accounts on your credit report.

Dropping Your FICO Scores

For many consumers, enrolling into Experian Boost will drop their Experian FICO Scores after enrollment. Why? There are a couple of critical factors. First, the number of accounts with a balance in a credit report is a huge factor in a FICO credit score. Many times, we have had to have clients drop out of Experian boost to get an improvement in their Experian FICO Scores. Experian will not tell consumers that problem.

Going into a program just because it is advertised is never a respected solution. Experian Boost has it drawbacks and they will never tell you that. Realize that you are not really going to see dramatic improvements – something over 50 points will be very unusual.

My Credit Plan averages a 81 point improvement because it analyzes your credit report and identifies specific things to address. The strategies found with My Credit Plan are not found with any other program. After a complete analysis, you can make quick credit score improvement by identifying correct steps to follow. That is the when you will see much better success.