There has been a lot of buzz surrounding an image from Fox News claiming higher credit score borrowers will be charged a 1% fee, while lower credit score borrowers will receive a discount of 1.75% on fees they would normally have to pay. This graphic is misleading and not entirely accurate. Borrowers with good credit will still receive a much better rate on their mortgage than those with a lower credit score.
Context From Me
Before I break down the details of this adjustment to mortgages going forward, I need to say the following: I am politically conservative and do not love the idea of robbing from Peter to pay Paul.
With that said, the image from Fox News is misleading. It is inaccurate, creating undue confusion and frustration among borrowers.
What Is Actually Happening
The image released is referencing Loan Level Price Adjustments (LLPAs), which impact the interest rate a borrower receives and are part of almost any mortgage loan. LLPAs are designed to help price a loan based on the risk associated with the borrower or overall structure of the loan. More risk equals more LLPAs.
LLPAs are not a percentage of the purchase price or loan amount that a borrower has to pay at closing. LLPAs do directly impact way a loan is priced, but not as a direct percentage of the interest rate. As an example, the direct impact of a 1% LLPA may actually be more like 0.125% in interest rate. It is not a 1% fee to be paid by the borrower nor is it a 1% higher interest rate to the borrower. Saying “740 FICO score pays 1% fee” makes it seem like closing costs will be higher by 1% of the loan amount. That’s not what is happening.
The government sets most LLPAs and adjustments are made based on various market and economic conditions. The Biden administration is planning to make adjustments to LLPAs in a few weeks, but the adjustments are not accurately reflected in the graphic shared. Higher credit score borrowers are not paying a 1% fee. Instead, the benefit to higher credit score borrowers is being slightly reduced and the penalty to lower credit score borrowers is being slightly reduced.
Borrowers with a 620 credit score or lower will still have more LLPAs than high credit score borrowers, but not as many. They will have an estimated difference of 1.75% less. Higher credit score borrowers will still have less LLPAs than lower credit score borrowers and will still be rewarded with a lower interest rate on a mortgage.
This Is Not New
It is important to note that adjustments to LLPAs and mortgage pricing is normal and has been happening for years. Furthermore, the adjustments to mortgage pricing for certain credit scores are only for one type of home loan option. There are many other home loan options available, and a Mortgage Broker can help borrowers find a program that is most favorable to the buyer’s needs.
Why Is This Happening
Although some argue this is being done to “buy votes” or to subsidize the less creditworthy by penalizing those with good credit, the changes to LLPAs happen both ways with adding or removing the price adjustments and are not exclusive to credit scores. There are many other LLPAs associated with debt ratio, loan to value, asset level, income type, property type, and more. In my more than 20 years in the mortgage industry, I can confidently say that LLPA adjustments are typically made to:
a) Help increase or decrease the number of loans being originated,
b) Increase or decrease the security of loans being originated,
c) Slow down or speed up the economy.
Therefore, in this particular economy, the LLPAs happening this time are likely being made to try and increase the number of loans that can be done and help the economy.
The recent changes to LLPAs for conventional home loans do not affect higher credit score borrowers the way the graphic portrays. Borrowers with good credit will still receive a much better rate on their mortgage than those with a lower credit score. The information shared by Fox News about this topic is misleading. There is not a 1% fee being charged to good credit borrowers. In my opinion, LLPA adjustments are less about politics and more about economics.
