The two biggest sources of mortgages for American home buyers plan to raise their base fees to counter what they see as continuing “adverse conditions’ in the real estate marketplace.
At the same time, however, Fannie Mae & Freddie Mac which currently fund more than ¾ of all new home loans also plan to selectively reduce fees for applicants whose likelihood of default and foreclosure appear to be lower than the companies previous estimates.
The changes are being driven by what’s known as risk based pricing. Factors such as your credit score, the size of your down payment and the type of loan you seek can push your expenses on a new mortgage up or down significantly – a difference of tens of thousands of dollars over the term of the loan.
Here’s what’s happening: As of Oct. 1, 2008 for new mortgages delivered to Fannie Mae, and Nov. 7, 2008 for loans delivered to Freddie Mac, baseline “adverse market” fees will be doubled, to 1/2 of a percentage point – up from 1/4. That works out to $500 per $100,000 borrowed and applies to all home purchasers and refinancers, regardless of their individual risk characteristics.
The higher fees will either be paid upfront during the application process or folded into the interest rate on their note – adding about 1/8 to the rate.
On the flip side of the higher baseline costs is a series of risk-based pricing changes keyed to individual borrowers’ scores and down payments. Both Fannie & Freddie now plan to reduce fees for borrowers with high FICO credit scores of 720 & up who make down payments of less than 15%. At the time of application, these borrowers will be quoted a credit of 1/4 percentage point – amounting to a cut in their fees.
Borrowers with FICO scores below 720 who make down payments of less than 15% will be charged 1/4 percentage point higher fees at time of application.
Why? Credit score standards are being raised dramatically. During the housing boom years, the dividing line between sub-prime applicants and borrowers who got a better rate quote was a FICO of 620. A 700 score was a virtual guarantee of best rate quotes available.
Fair Issac Corp.’s, (FICO) scores range from 300, highest risk – 850, lowest risk. Now even FICO scores in the upper 600’s and low 700’s are subject to higher fees. A 739 FICO no longer makes the highest grade when the applicant cannot make a 30%-40% down payment; worse yet, if your FICO is below 720 and you don’t have at least a 30% down, you’re going to get hit with a 1/2 percentage point delivery fee.
In an interesting twist, people making the lowest down, but who have credit scores above 720 can expect fee decreases of a 1/4 percentage point – which on its face seems counterintuitive, since default risks rise as down payments shrink. Fannie & Freddie’s position – all loans with 20% or smaller down payments require private mortgage insurance, (PMI), and both Fannie & Freddie have decided they can charge a little less on such loans because the insurance lowers their risk of serious loss.
This is great news for the moderate income, first time home buyers with sterling credit but don’t have a lot of cash for a down payment.