Better Rate Options for Lower Credit Score & Lower Income Households Coming Soon!
“FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework
FOR IMMEDIATE RELEASE
1/19/23
Washington, D.C. – The Federal Housing Finance Agency (FHFA) today announced further changes to Fannie Mae’s and Freddie Mac’s (the Enterprises) single-family pricing framework by introducing redesigned and recalibrated upfront fee matrices for purchase, rate-term refinance, and cash-out refinance loans.”
What in the world does all this mean?
Open your search engine of preference and enter “affordable housing”. You will likely pull 400 million results. The United States has a shortage of nearly 7 million affordable homes for 10.8 million extremely low-income American families.
While industry professionals agree that many variables are to blame for the affordable housing crisis, that doesn’t address the issue. Millions are unable to purchase a home as a result.
Is there hope? The Federal Housing Finance Agency (FHFA) is certainly trying to help and here’s how.
When financing a home, the homebuyer will borrower the funds needed and pay interest on the principal balance at a rate that is secured by the lender who is providing the funds. The amount of interest paid will depend on the length of the loan, the interest rate, and the balance borrowed.
As of May 1, 2023, lenders will be required to provide revised pricing on certain home loan options with respect to loan to value (LTV) and the homebuyer’s credit score.
I’m still waiting for an explanation that makes sense…
Until recently, when financing just about anything, consumers would receive better terms (relatively lower interest rates) with higher credit scores. In fact, the terms may be even better depending on how large the down payment would’ve been. Some capital markets and lending experts refer to lower relative rates or same rates with lower costs as “better pricing” and higher rates or same rates with higher costs as “worse pricing”.
Beginning May 1, 2023, this will not be the case in some scenarios. In fact, it may even be opposite. That’s right, worse pricing for higher credit score borrowers and better pricing for lower credit score borrowers depending on the borrower’s income, down payment (or LTV) and loan type (i.e. home purchase, refinance, primary residence, 2nd home, investment property, etc…).
For example, beginning May 1, 2023:
Case A:
A family with a household income that is more than 100% AMI (average median income) with a credit score of 700 and a 20% down payment on a home purchase using standard conventional home loan financing will have to pay 1.5% (of the loan amount) more for the same interest rate offered as they would today. If the home sale price is $450,000 and the 20% down payment is $90,000, the loan amount would be $360,000. 1.5% of $360k is $5,400. This means that in this example, this homebuyer would have to pay $5,400 after May 1, 2023 for the same interest rate that they would receive today for $0.
Case B:
A family with a household income that is less than 100% AMI (average median income) with a credit score of 620 and a down payment 5% on a home purchase using standard conventional home loan financing will have to pay 2.25% (of the loan amount) LESS for the same interest rate offered as they would today. If the home sale price is $250,000 and the 5% down payment is $12,500, the loan amount would be $237,500. 2.25% of $237.5k is $5,343. This means that in this example, this homebuyer would have to pay $5,343 LESS after May 1, 2023 for the same interest rate that they would receive today.
If you look closely, you’ll notice that the additional amount required of the homebuyer in Case A ($5,400) is very close to the savings realized of the homebuyer in Case B ($5,343). Could this imply that more qualified buyers are being charged a premium to subsidize the cost for less qualified homebuyers as a way to address the affordable housing crisis?
You decide.
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America. You can sign up for more relevant housing market news and homebuyer education at TheHomeLoanHub.com.
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