If you are planning to buy a home or refinance your mortgage in 2023, you may have heard about some changes to the fees that Fannie Mae and Freddie Mac charge to lenders based on certain risk factors of the loans they buy from them. These fees are called loan-level price adjustments (LLPAs) and they affect the interest rate or closing costs that you may pay as a borrower.
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, directed them to update their LLPA framework and pricing matrix starting May 1, 2023.
You may be wondering how these changes will affect you as a homebuyer or a homeowner. In this article, we will explain some misconceptions about the new 2023 LLPAs and why you should not let them discourage you from pursuing your homeownership goals.
An unfortunate misconception
There’s an unfortunate misconception that borrowers with good credit are paying for borrowers with bad credit. The misconception stems from a political vantage point. It's dangerous to politicize housing issues. The reality is, LLPA changes aren't a right or left issue, and those of us in the industry must reject those implications. Politicization simply adds risk when stability is what we strive for.
In truth, the new LLPAs are based on a combination of factors that reflect the risk profile of each loan. Credit score is only one of these factors. Also considered are the loan amount vs. the value of the home (loan-to-value, or LTV) as well as the occupancy type and other factors.
Furthermore, the mortgage industry came together to address concerns about the FHFA’s original plans, which would have increased fees for those with higher debt-to-income ratios. After collaborative consideration, the FHFA acknowledged that higher fees based on debt ratios would work against its efforts to make homeownership more attainable.
Some scenarios are actually better for borrowers than under the old guidelines
There are scenarios for a purchase transaction in which pricing is more favorable under the new pricing matrix. For example:
- A borrower with a FICO credit score of 780 or higher has zero LLPAs (no additional fees) with a 25% down payment.
- A borrower with a credit score of 760-779 has zero LLPAs with 30% down.
Because the new matrix is constructed differently, apples-to-apples comparisons with the prior matrix aren’t necessarily instructive. However, to give a sense for how these well-qualified borrowers may do better under the new matrix, consider that in the past they’d need to have put 40% down to avoid LLPAs (granted, though, the minimum credit score was a bit lower, at 740).
When pricing is higher, how much higher is it?
Now let’s look at a situation where someone might pay slightly more and get a sense for just how much that is. Here at Johnson Financial Group, our average mortgage loan size so far in 2023 is about $332,500. Let’s assume the following:
- Fixed-rate loan amount of $332,500 toward a purchase price of $350,000, which equates to a 5% down payment (or 95% loan-to-value ratio)
- Credit score in the range of 720-739
Under the old pricing matrix (but current interest rates), that scenario would imply a rate of 6.8% with monthly principal and interest payments of $2,167.65. Under the new pricing matrix, the rate would be slightly higher, at 6.95%, resulting in monthly principal and interest payments of $2,200.98.
So, in this example, the borrower would pay $33.33 per month more under the new matrix, or about $400 per year. No one would welcome an additional $400 expense, all things considered, but for most homebuyers it’s a small matter relative to building equity and living in a place that suits their needs.
Beyond primary residences, there are some situations in which mortgage pricing will be higher than in the past. These include second homes and investment properties.
Potential benefits for first-time homebuyers
Remember, too, that in other scenarios borrowers actually fare better under the new pricing, as we saw in the earlier example. Another situation where that’s the case is first-time homebuyers who are at or below the median income for their area or are purchasing in designated areas.
Let’s assume again a $332,500 loan toward a purchase price of $350,000 and a credit score in the range of 720-739. This time, though, let’s say the borrower is a first-time homebuyer and at or below the area’s median income. In this case, the rate would be 6.6%, which equates to $2,123.54 of monthly principal.
Bottom line, it’s important to talk to your lender who can help strategize the best down payment scenario for you.
Home values are still appreciating in our area, and purchasing a home is still attractive for many people. If you are interested in buying a home in 2023, you should not let these changes discourage you from pursuing your homeownership goals. We regularly recommend three things to borrowers, and all three ring true as much now as prior to shifts in the market and LLPA pricing changes:
- We advise against trying to time the market, whether that’s purchase prices or interest rates. If you have a life event prompting you and your family to make a move, that’s the time to act. Markets adjust over time, and you may have opportunities (such as refinancing) to adjust with them. The main thing is to meet your family’s needs—and to be as informed as possible as you do so.
- You should work with a knowledgeable and experienced lender who can help you understand what you qualify for and how to make a responsible and informed choice. You should also get pre-approved for a mortgage before you start looking for homes so you know where to focus and can act quickly when the time comes.
- Your lender can recommend a qualified real estate agent who is working for you.
These steps ensure you're in the most confident and advantageous position possible—no matter what’s happening in the market or behind-the-scenes in mortgage markets.