Is There Really a New, Unfair Mortgage Tax on Those With High Credit?
Seemingly overnight, the internet is awash with news regarding a “new,” unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score in order to get a better deal. Before you stop paying your bills in the hope of cashing in, let’s separate fact from fiction. First and most importantly, you will absolutely NOT get a better deal on a mortgage rate if your credit score is lower, even if you see a screenshot of a news headline saying “620 FICO SCORE GETS A 1.75% FEE DISCOUNT” and “740 FICO SCORE PAYS 1% FEE.”
This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the “agencies”), the two entities that guaranty all Conventional mortgages. LLPAs are based on loan features such as your credit score and the loan-to-value ratio among other things. They’ve been changed several times over the years and a fairly substantial change was announced in January of this year, which the news is just now reporting on and causing a panic over.
Wait… This news is from JANUARY? Why are people talking about it now?
People are confused because the news doesn’t understand how “delivery dates” work when it comes to Fannie and Freddie. Changes that impact fees and guidelines are almost always implemented based on the date a mortgage is “delivered” to Fannie/Freddie. “Delivery” typically occurs a weeks AFTER the loan is closed, although it can be more than a month. Most closed loans are quoted and locked more than 3 weeks prior to closing, if not longer. Since these changes go into effect on loans delivered on or after May 1st, 2023, the entire mortgage industry began to implement these changes several weeks ago.
So low credit borrowers are getting a discount while high credit borrowers pay more?
Not exactly, and this is where the confusion comes in. These LLPA changes are indeed improving costs for those with lower credit scores and increases costs for those with higher credit scores (in many cases, anyway). However, people are confusing the CHANGE for the ACTUAL cost. There’s no scenario where someone with lower credit will have a lower cost (or LLPA) compared to someone with a higher credit score – the difference now is just not as big. In other words, don’t go skipping those credit card payments in the hopes of getting a lower rate. Using an 80% loan-to-value ratio as an example, your LLPA at 640 is 2.25% versus 0.875% for a 740 score. That’s a difference of 1.375%, or just over $4000 more in cost on a $300k mortgage for having a 640 credit score vs a 740.