There’s been talk in real estate circles lately, that buyers with higher credit scores will be penalized and have to pay higher fees when buying homes than buyers with lower scores. Recent changes implemented by the Federal Housing Finance Agency as of May 1 have prompted the buzz on this topic… But is it factual? And if so, why would the government ding borrowers for using credit responsibly?
Let’s take a deeper dive to check the facts.
First off, the fees you’re hearing about are loan-level pricing adjustments (LLPAs), which have been around since the Great Depression, so they’re nothing new. These fees are also sometimes referred to as risk-based fees, and they affect conventional loans only; note that LLPAs do not come into play with FHA, VA, or USDA (Rural Development) loans. “The rule changes are part of the Federal Housing Finance Agency’s (FHFA) efforts to provide ‘equitable and sustainable access to homeownership’ and to strengthen capital at Freddie Mac and Fannie Mae.”*
Depending upon the loan amount, property type, and credit score, LLPA fees can range between .125% and 2.875%. And while borrowers with higher credit scores won’t necessarily be paying more in fees because of their scores— those making a 6% to 25% down payment may pay slightly more, based on a credit score sliding scale. The real kicker here is actually the down-payment.
The below chart illustrates the scale of fees based on credit score and percentage of down payment.
The reasoning behind this May 1 shift is to assist more first-time home buyers and people with fewer cash reserves in achieving home ownership.
What does this mean in Northwest Arkansas? The updated fee schedule may help more Arkansans achieve home ownership, as only 66% of homes in Arkansas are owner-occupied (source: Census.gov). The average credit score in Arkansas in 2022 was 694, compared to the national average of 714, according to data from Experion. See the below for the progression of average scores by year for the prior twelve years.
So in summary, borrowers with good credit aren’t actually paying more because of their scores but will indeed receive less consideration than prior to May 1, while lower credit customers now benefit from more consideration— all with a goal to stimulate opportunities for more to achieve homeownership.
Have a question about something real estate-related that you’re hearing around the water cooler? Remember, you can always trust NWALook for the latest news and advice.
Contact: Crew@nwalook.com