“The higher your credit, the more your loan will cost.”
You’ve probably seen this headline recently…
“The higher your credit, the more your loan will cost.”
There is significant confusion about what this means, so I asked my preferred lender, Joe Massey, to clarify the situation.
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There’s been a flurry of news activity in the last month about the new “Government Imposed Fees” on mortgages. The vast majority of the headlines have some derivation of: “The higher your credit, the more your loan will cost.” This is, unfortunately, not an accurate representation of what’s truly been happening in the mortgage market. Let’s take a quick dive in to this topic and separate facts from fiction.
Before we get started, I’d like to offer an important caveat that I’m not advocating that these changes as right/wrong or good/bad. My intent is to inform and educate to help you make the best possible decision about your home buying journey.
Loan Level Price Adjustments or more commonly referred to as “LLPAs” are the costs associated with your mortgage and these costs are dependent on a number of factors such as credit score, down payment, property type, etc. These are not a new development and have been a part of the mortgage market since 2008. Periodically (about once / year) the government mortgage agencies (Fannie Mae and Freddie Mac) do a review of the prior year’s loan performance and they determine if there are certain loans performing better or worse than others. From that review they make a determination if certain tranches (or “buckets” of mortgages) need to be charged a higher or lower cost depending on their risk and historical performance. During this year’s review the government mortgage agencies determined that some lower credit score borrowers were performing better than expected and thus the costs that those borrowers would need to pay for future mortgages could be decreased. They also determined that some middle credit score borrowers were performing worse than expected and thus the costs that those borrowers would need to pay for future mortgages would need to be increased.
This led to a very confusing chart coming out from the government mortgage agencies as well as this chart making it’s way to numerous news outlets:
If you only saw this chart without any context, it would be easy to think that someone with a 640 credit score and putting 30% down (Loan-To-Value of 70) would be paying less than someone with a 740 credit score putting down only 15%. But this chart is simply the CHANGES for each tranche (or “bucket” of borrowers). You can see that some borrowers are paying less (indicated in green) and some borrowers may pay more (indicated in red) than had they applied for a loan prior to May 1st. But how does this translate to real dollars for a client today? Let’s compare a real world scenario as of today:
760 FICO Borrower – 20% Down – $600,000 house – $480,000 Loan Amount
February 15th – Rate of 6.5%, cost of 1.0% Discount Points = $4,800
June 15th – Rate of 6.5%, cost of 1.125% Discount Points = $5,400 — Increase of $600 for this borrower based on the new LLPA changes
660 FICO Borrower – 20% Down – $600,000 house – $480,000 Loan Amount
February 15th – Rate of 6.5%, cost of 2.75% Discount Points = $13,200
June 15th – Rate of 6.5%, cost of 1.875% Discount Points = $9,000 — Decrease of $4200 for this borrower based on the new LLPA changes
You can see above that a borrower with a 760 credit score buying the exact same house, exact same down payment, with the exact same rate is paying $3,600 less in discount points or “LLPAs” than a borrower with a 660 credit score. Now it is true that the 760 borrower is paying slightly more than they were prior to May 1st of this year and the 660 borrower is paying quite a bit less than they were prior to May 1st of this year; but these changes are due to historical averages. That is, borrowers with lower credit scores have been performing much better than expected over the past year and thus can be charged less (this is called risk-based pricing) and borrowers with higher credit scores have been performing slightly worse than expected over the past year and thus need to be charged slightly more (again risk-based pricing).
Does this mean that borrowers with lower credit scores are getting charged less than borrowers with a higher credit score? NO! This means that borrowers with lower credit scores have been performing really well historically and now can be charged a less than in the past while borrowers with high credit scores have been performing worse than historically average and can be charged slightly more to make up for the worse historical performance. If you’ve been following any of the headlines that recommend “You should ruin your credit before applying for a mortgage so you can get a lower rate!” please do NOT do this! Call me before you make any drastic changes in your credit and I’ll be happy to walk you through any questions or concerns that you have.
Joe Massey
Senior Loan Officer
Castle & Cooke Mortgage
303-809-7769
jmassey@castlecookemortgage.com
https://www.loansbyjoemassey.com/