If buying a home is on your wish list for 2023, you might want to know the minimum mortgage requirements for the most common loan programs available.
A conventional loan remains the most popular mortgage option. Most mortgages in the U.S. are conforming, meaning that they qualify to be purchased and guaranteed by Fannie Mae and Freddie Mac.
If you are shopping for a mortgage, there are 2023 changes you might want to know since of those changes is very confusing : homebuyers with higher credit scores will see higher mortgage costs!
*You can view a map of the NEW 2023 county loan limits here.
Changes to pricing for conventional loans are in the news as the proposed changes are set to take place in May. The reality is that these changes have already taken place, because they are effective for loans delivered to Fannie Mae or Freddie Mac in May. Loans closing in the next couple weeks will be the first to be delivered with the updated pricing, but due to the nature of a purchase contract period, many of these loans have been locked over the last 3-4 weeks.
It's a bit surprising to see the uproar today about this topic, as the news of this change came out early in the year, but what is certain is that uproar is warranted, and should be even louder. So what's happening?
In an "effort to help more people achieve home ownership" (their words), the Biden administration and FHFA (Federal Housing Finance Authority, the bureaucratic group overseeing Fannie Mae, Freddie Mac, and as a result, the majority of the housing market) have altered loan pricing for conventional loans.
In the past, loan costs were based on risk - the more risky a loan, the higher the rates and cost to get the loan. With these changes, less risky loans are being charged more, with more risky loans receiving price breaks. In short, those with poor credit and low down payments are being subsidized by those with larger down payments and higher credit scores.
Personally, I'm all for giving price breaks to people with lower credit and lower down payments. To qualify for a conventional loan, a borrower has to be in at least decent financial shape, and have at least decent credit. My concern is that those "price breaks" are being subsidized by charging those with excellent credit and money to put down additional fees. This is where the outrage should come in. After all, why should those who have exercised financial responsibility and put in the hard work of saving a down payment pay more to basically fund cheaper loans for those who have not done those same things?
It's important to understand how these price changes work, because they can be quite large. Looking at the "heat chart" above you can see which buckets of loans are getting a price break, and which are seeing prices increase. The decimals are a % of loan amount. So, to follow, if you look at the loan bucket for a borrower with 10% down payment and a 740-759 credit score (excellent credit), you can see that they will see an additional .5% charge on their conventional loan. In terms of dollars, this is .5% of whatever the loan amount will be. So in this bucket, someone borrowing $500,000 will see an additional $2500 in loan charges, or a higher interest rate that absorbs this $2500 fee.
On the flip side, that same scenario with the same 10% down payment and a credit score in the 640-659 range (below average credit), will see a $3,750 improvement in pricing.
In the recent past, conventional loans didn't even have LLPAs (loan level price adjustments) - if you qualified for a conventional loan, you received the conventional loan rate. When LLPAs were implemented, anyone with a 740 or higher FICO score saw no adjustments to rate. This made sense, considering those with a 740+ FICO score have very little risk of default. With the changes being made by the Biden administration, borrowers with FICO scores up to 780 will see their loans get more expensive.
An example of how absurd this change is can be seen in this scenario: A home buyer with some money saved is trying to decide between putting 5 and 15% down. If they have a FICO score between 740-759, putting more money down has a negative impact on the loan they'll receive. More money down, and therefore lower risk for the bank, equates to a higher rate or potentially thousands of dollars in additional loan charges. It makes no sense. In another example, if 2 borrowers apply for a loan and each has 20% down. One of these borrowers has a 681 FICO, and the other has a 679 FICO. Who should get the better rate? In a world where any common sense was used, these folks would get the same rate - a 2 point difference to credit score is negligible in terms of risk. If the 681 FICO score got slightly better terms, that would be palatable. However, with the changes to conventional pricing, you can see that there's a .875 improvement to pricing for the 679 FICO borrower. That means on $500,000 loan, the person with lower credit is seeing a $4,375 improvement to price.
It's no secret that I'm not a fan of the current administration (to be clear, I haven't been a fan of any administration in my adult life), but this isn't about politics. Joe Biden and his administration are taking action to make life more difficult and more expensive for an already decimated middle class. This doesn't effect the rich - they're not getting conventional loans, but are obtaining jumbo loans mostly through private investor channels for high net worth individuals. This directly effects the middle class by making things more expensive for anyone with decent credit wanting to buy an average home. Want to put less money down? Well, maybe your loan pricing will be better, but your mortgage insurance will be more expensive. Want to put more money down to reduce or eliminate the mortgage insurance? Well, your loan rate or loan fees will be higher as a direct result to this change.
Lending has always been based on risk. The higher the risk, the higher the interest. The more likely you as a borrower are to default, the more expensive it is to borrow. If you're a low risk borrower, your rate has always been lower. It makes sense. In today's climate, those who are doing the right, responsible thing - managing credit, repaying debts as agreed, and saving money, are being penalized. Not only are they being penalized, they're being gouged on an already prohibitively expensive home buying process, with the money being taken out of their pocket given directly to those who have not saved and have not been as responsible with their finances.
If these changes frustrate you as much as they frustrate me, I highly recommend reaching out to your local congressional representatives. This isn't about politics, it's about sound policy in lending and housing. Lower risk loans should come with lower costs. Higher risk loans should come with costs that cover their own risk. Higher risk loans shouldn't have their risk covered by lower-risk customers.
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