Under a new fee structure, some homebuyers with strong credit will now pay more than before for conventional mortgages backed by Fannie Mae and Freddie Mac, while some buyers with weaker credit will pay less.
Overall, borrowers with strong credit will still generally pay much less than people with weaker credit. But the fee restructuring by the Federal Housing Finance Agency caused a stir, with some critics saying the changes seem to punish applicants with strong credit.
Key takeaway: Whatever shape your credit’s in, if you’re looking into a federally backed mortgage, you’ll want to check how the FHFA’s new fee structure figures into your upfront homebuying costs.
Key facts about the new FHFA mortgage fee structure
The FHFA has updated the matrix of upfront fees for purchase loans, limited cash-out refinances and cash-out refinance loans backed by Fannie Mae and Freddie Mac. The fees, known as LLPAs (loan-level price adjustments) are typically converted into percentage points that alter the buyer’s mortgage rate.
The new fee structure …
- Went into effect May 1
- Will only impact loans originating at private banks across the U.S., not federal loans like FHA, VA or USDA loans
- Will have some — but not all — people with strong credit paying higher fees than before, and some but not all people with weaker credit paying lower fees than before. The equation depends on down payment size.
- Generally, if you have strong credit, you’ll still pay a lot less in fees than people with weaker credit.
- In fact, for people with the highest scores (780 and up), fees went down or stayed the same in most cases.
What the changes mean for mortgage affordability
Here’s an example of how the changes have a higher-score borrower paying more than before, and a lower-score borrower paying less. In this scenario, both make a 20% down payment on a $300,000 loan.
Higher-score applicant — Before, someone with a credit score in the 760 to 779 range would have paid an upfront fee equal to 0.250% of their loan amount, or $750. Under the new structure, the fee jumps to 0.625% — or $1,875.
Lower-score applicant — Before, someone with a credit score between 640 and 659 would have had a 2.750% fee added to the base mortgage rate, or $8,250. That fee drops to 2.250% — or $6,750 — under the new fee structure.
The lower-score applicant gets a significant break under the new scheme but still pays more than four times as much as the higher-scoring borrower.
Some critics accuse the FHFA of charging some borrowers with strong credit scores more to pay for the fee decreases for lower-scoring homebuyers. But the FHFA says the new structure more accurately reflects current risk for all credit profiles — better protecting banks — while promoting more equitable access to homeownership.
Tips for mortgage shopping
To ease the loan approval process and give yourself the best chance at lower fees and better mortgage rates, take time to get your finances in order.
- Check your credit reports and scores. Make sure there are no errors pulling your scores down. You can dispute an error on your credit report with the credit bureaus.
- Improve your debt-to-income ratio. Earning more money or paying off debts — or both — can help you qualify for a bigger mortgage.
- Up your down payment. You may qualify for a mortgage with a small down payment, but a bigger one reduces your principal balance on the loan, saving you money over the term of the mortgage. You also might not have to pay for private mortgage insurance.
- Shop around. Every lender has different guidelines and interest rate options, which can have a big effect on your monthly payments. Getting multiple quotes may give you negotiating power and will help you choose the best mortgage lender for your situation.