News outlets recently reported a rule focusing on mortgage borrowers with higher credit scores. The reality is that changes are being made to the Loan-Level Price Adjustments (LLPA) matrix by the Federal Housing Finance Agency (FHFA) in May 2023 to address housing affordability challenges in the US. The LLPA matrix applies pricing adjustments to base on factors such as credit score, loan-to-value ratio, occupancy type, and debt-to-income ratio and is used by Fannie Mae and Freddie Mac, which guarantee a significant proportion of new mortgages.
It’s important to clarify that lower credit scores do not necessarily result in better mortgage rates. The recent talk of unfair changes is related to changes made to LLPAs, which have undergone revisions over the years, with a significant adjustment announced in January 2023.
While having a credit score under 680 still incurs higher adjustments, the effective LLPA’s has decreased. For example, a borrower with a score of 659 and borrowing 75% of a home’s value now has a 1.5% adjustment, compared to a borrower with a 780+ credit score. Previously, the adjustment for a score of 659 would have been a substantial at 2.75%, representing a $3750 difference in closing costs on a $300k loan.
Another significant change is introducing an adjustment for the DTI ratio, which could be controversial as income calculations can be subjective, and debt calculations can be manipulated with strategic planning or debt consolidation. However, the average loan guaranteed by the agencies has a DTI ratio of roughly 43%. Therefore, borrowers with a ratio over 40% and borrowing over 60% of their home’s value should expect higher adjustments. The Mortgage Brokers Association has been actively advocating against the DTI adjustment. As a result, the implementation has been delayed.
In conclusion if a credit score is higher there will still be LLPA’s based on risk factors of the loan. A lower credit score will also have LLPA’s based on the risk factors of the loan. The LLPA’s have been adjusted in an attempt to “level the playing field” for all.
HomeXpress Mortgage Corp. is committed to serving borrowers with and without credit challenges. Our team of underwriters manually reviews each file to find a solution for your borrowers.
Contact one of our experienced and knowledgeable Account Executives at (855) 598-1430 to learn how HomeXpress Mortgage Corp. can help you grow your pipeline.