The Biden administration just announced a rule to help subsidize mortgage costs for homebuyers with lower credit scores.
Federal mortgage associations Fannie Mae and Freddie Mac, in cooperation with the Biden administration, have released a new plan to encourage homeownership for those with lower credit scores that typically may have had trouble getting access to favorable mortgage terms. The rule is being referred to as the “Loan–Level Price Adjustment.”
Breaking down the new Loan–Level Price Adjustment (LLPA):
When? Going into effect May 1, 223
What? Borrowers with high credit scores will face higher mortgage fees and those with lower credit scores can take advantage of lower fees.
- Homebuyers with credit scores of 680 or higher: will face an increase in monthly mortgage payments. The exact percentage will depend on the size of the loan.
- Homebuyers able to make a 15-20% down payment will face the biggest fee increase, at roughly 0.25% for each rate
- Homebuyers with credit scores of 500-680 will experience the largest fee decrease with 0.75 percentage points lower than before when their down payment is 20%.
Potential consequences of the plan
The rule is a significant change in the US housing market, which has faced a shortage of available and affordable properties and rising interest rates. Its aim is to widen accessibility of homeownership among lower income and minority families, which historically, have had trouble getting access to mortgages. However, of the fee increase is unlikely to lead to significantly higher monthly mortgage payments for most borrowers. For instance, someone with a $400,000 loan and a 6 percent mortgage rate may wind up paying about $40 more per month, according to calculations.
But those extra fees for good credit homeowners could add up. And over the whole course of mortgage repayment, a homeowner could wind up paying thousands of dollars more due to the fee shift.
However, some are criticizing the plan, saying it rewards those with bad credit and punishes those with good credit.
What could this mean for you?
The new policy is expected to have an impact on borrowers with good credit who are looking to obtain a new mortgage, but it is not expected to have a significant impact on those with existing mortgages. Existing mortgage borrowers with good credit should not be directly affected by the new policy, but they may want to keep an eye on how the policy plays out and how it could impact their ability to refinance their mortgage or obtain a new mortgage in the future.
While the new policy aims to make it easier for high-risk borrowers to obtain a mortgage, it's important to note that this doesn't mean that getting a mortgage is necessarily the best option. High-risk borrowers, who may have lower credit scores and may be considered more likely to default on their mortgage, may still face higher interest rates and stricter lending requirements.
Furthermore, taking on a mortgage is a significant financial commitment, and borrowers should carefully consider their ability to make their monthly mortgage payments before applying for a loan. Borrowers should also consider other factors, such as the size and type of the home they're looking to purchase, and whether they're prepared to take on the responsibilities of homeownership.
Overall, high-risk borrowers should work with a trusted mortgage professional to determine whether a mortgage is the right option for them, and to explore other options that may be available to help them achieve their homeownership goals.