Bad News: Good Finances Could Hurt Your Mortgage Terms

On May 1, the federal government will change the fees that most borrowers pay as part of buying a new home. The changes will have a counter-intuitive result: many borrowers with lower credit scores paying less in fees when they take out a loan, while those same fees will increase for borrowers with higher scores.

This has some people outright incensed.

The uproar is over a financial document known as the Loan-Level Price Adjustment Matrix.

For help determining how these changes will affect your own finances, consider matching for free with a vetted financial advisor.

How Mortgage Terms Typically Work

Most of the market for individual mortgages is underpinned by two federally run corporations, Fannie Mae and Freddie Mac. These corporations guarantee the housing market by purchasing mortgages from banks and packaging them into debt-backed securities to sell to third-party investors.

This props up the overall lending market in two ways. First, it ensures that banks and lenders have liquidity. Instead of having to wait for payments to trickle in, lenders can get their cash back immediately, which they can then send back out in the form of new loans. Second, it reduces the cost of lending to private households and individuals. Lenders can charge less interest and extend mortgages more readily since the federal government effectively guarantees the loan.

Without Fannie Mae and Freddie Mac, it would be far more difficult for individuals to get a loan to buy a house. Instead the market would be even more dominated by corporate landlords than it already is, since their liquidity and credit could consistently outbid individuals. As a result, most individuals get a Fannie- or Freddie-backed loan, making the federal government deeply involved in the mortgage and housing markets. The terms set by Fannie Mae and Freddie Mac largely define the terms that most lenders set for a standard, 30-year mortgage.

These terms include fees called Loan-Level Price Adjustments, or LLPAs. These are fees that Fannie Mae and Freddie Mac charge to the lender for guaranteeing a loan. They price that fee as a percentage of the underlying mortgage. The lender, in turn, passes these fees along to the borrower. Most lenders package the LLPA into the mortgage interest rate, although some pass the fee along as an up-front charge.

For all borrowers, an LLPA fee is based on the borrower’s credit rating and down payment. The larger the down payment, the lower the LLPA fee — to the point where Fannie Mae and Freddie Mac don’t charge this fee for borrowers who put more than 70% down. At the same time, the better a borrower’s credit score, the less he typically pays in LLPA fees.

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Change: Lower Credit Scores Yield More Favorable Mortgage Terms Than Before

Effective as of May 1 the Federal Housing Finance Agency, the agency which runs Fannie Mae and Freddie Mac, will change the formula for calculating Loan-Level Price Adjustment fees. The new structure, called the LLPA Matrix, will make it cheaper for some borrowers by reducing their fees. However these benefits are focused on making mortgages less expensive for lower-income borrowers and those with weaker credit scores. The result is that fees will go down for borrowers with weaker credit, but will go up for most borrowers with higher credit scores.

For example, at time of writing the average down payment for a house was 6% of the loan’s value. (As home prices have shot up, making it harder for new buyers to scrape together 10% or 20% in cash, this figure has trended down.)

Under the previous LLPA matrix, a borrower making the average down payment with a credit score of 660 would pay 2.25% in fees. A borrower making the same down payment with a credit score of 740 would pay 0.25% in fees.

Under the new LLPA matrix, that same borrower with a 660 credit score will pay 1.625% of the mortgage value in LLPA fees. The borrower with a 740 credit score will pay 0.625%.

Fee calculations have also grown more complicated, as the new price matrix looks at credit scores with far more granularity, creating several new categories of credit/down payment fee structures.

This comes at a time when new borrowers also face significantly higher prices due to Federal Reserve interest rate increases. Many lenders are charging three times what they did in 2021 and 2022.

A Higher Credit Score Is Still Better For Your Mortgage Terms

While much reporting has implied otherwise, the new LLPA Matrix has not changed the basic relationship between higher and lower credit scores. Borrowers with better credit will still pay significantly lower fees than borrowers with weaker scores. The difference is that the new system will increase fees for many borrowers with scores over 700, while it will decrease fees for many borrowers with scores under that mark.

According to a statement issued by the Federal Housing Finance Agency, the purpose of this adjustment is twofold. The agency wants to expand access to single-family homes for “borrowers limited by wealth or income.” At the same time, it wants to improve the financial position of Fannie Mae and Freddie Mac. While the agency has not issued a further statement at time of writing, it appears to have done so by increasing fees for borrowers who are typically higher-income while reducing fees for borrowers who are more likely to struggle.

These new rates will also apply to existing homeowners who seek to refinance their homes, as the terms set by Fannie Mae and Freddie Mac apply to all government-backed mortgages.

Bottom Line

Fannie Mae and Freddie Mac have issued a new fee structure for mortgages. The result will moderately increase the price of a new loan for borrowers with higher credit scores, while similarly reducing the price of a new mortgage for borrowers with weaker credit.

Mortgage Tips

• Mortgages can be both shockingly complicated and incredibly simple. You make one payment every month, but a whole lot goes on behind the scenes.

• Is now the right time to buy a home, and how will these new rules affect you? With SmartAsset’s matching tool you can find a financial professional near you to help you decide when it’s right for you to start looking, and when it’s the right time for you to buy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors. And you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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