Starting May 1st, changes to the fees associated with obtaining a mortgage will go into effect, impacting borrowers with lower credit scores and smaller down payments. The changes will make mortgages more accessible for these borrowers, by reducing Loan-Level Price Adjustments (LLPAs) for those with credit scores between 620 and 679, as well as for borrowers with down payments of less than 20%.
New fee structure
The new fee structure will work by reducing the amount of fees charged to borrowers who are considered higher risk, based on their credit score and down payment amount. These fees are charged by mortgage lenders to compensate for the additional risk involved in lending to borrowers with a lower credit score or smaller down payment, and are known as Loan-Level Price Adjustments (LLPAs).
Under the new rules, borrowers with credit scores between 620 and 679 will see a reduction in their LLPAs, making it easier and more affordable for them to obtain a mortgage. However, it’s important to note that while the fees may be reduced, borrowers with lower credit scores may still be required to pay higher interest rates and provide additional documentation to lenders.
Similarly, borrowers with down payments of less than 20% will also see a reduction in their LLPAs. This will make it easier for first-time homebuyers and others with smaller down payments to enter the housing market, by reducing the upfront costs associated with obtaining a mortgage.
Example of the Change
Here’s an example of how the new fee structure will work for a borrower with a credit score of 650 and a down payment of 15%, seeking a 30-year fixed-rate mortgage for $300,000:
Under the previous fee structure, the borrower would have been required to pay a Loan-Level Price Adjustment (LLPA) of 1.5% of the loan amount, or $4,500, due to their lower credit score and smaller down payment. This fee would have been added to the borrower’s closing costs and could have made it more difficult for them to afford the upfront costs of obtaining a mortgage.
However, under the new fee structure starting May 1st, the borrower’s LLPAs would be reduced to 1%, or $3,000, due to their credit score falling within the new reduced LLPAs range. This reduction in fees would make it easier and more affordable for the borrower to obtain a mortgage, by lowering their upfront costs and reducing the amount of money they need to bring to the closing table.
Overall, this example shows how the reduction of LLPAs under the new fee structure can benefit borrowers by making mortgages more accessible and affordable, particularly for those with lower credit scores and smaller down payments.
While these changes are expected to benefit borrowers, they may also impact lenders by reducing their revenue and profits from higher-risk loans. To compensate, lenders may require additional documentation or higher interest rates for borrowers with lower credit scores or smaller down payments.
In conclusion, the fee changes going into effect on May 1st in the mortgage industry aim to make mortgages more accessible for borrowers with lower credit scores and smaller down payments, by reducing Loan-Level Price Adjustments (LLPAs). While this may make it easier and more affordable for these borrowers to obtain a mortgage, it’s important to work closely with lenders to understand the impact of these changes on your specific mortgage, and to explore options for reducing fees and obtaining the best possible interest rate.