Mortgage Education

The Federal Housing Finance Agency (FHFA) recently made a significant announcement regarding the removal of the debt-to-income (DTI) loan-level price adjustment (LLPA) change. This decision has been met with support by pretty much everyone in the mortgage industry. In short, the government agency (FHFA) was trying to add a fee to all mortgages for people who had a “high” debt to income ratio of above 40%.

What are Loan-Level Price Adjustments (LLPA)?
Loan-Level Price Adjustments, commonly referred to as LLPAs, are an integral part of mortgage pricing. They are charges imposed by government institutions, Fannie Mae and Freddie Mac, to compensate them for additional risks associated with specific loan characteristics. LLPAs are used to offset potential losses resulting from factors such as lower credit scores, higher loan-to-value ratios, “riskier” property types (condos, duplexes, triplexes, etc), and other borrower or loan attributes that may increase risk for Fannie Mae and Freddie Mac when they buy mortgages.

How LLPAs Affect Loans
LLPAs play a pivotal role in mortgage pricing, as they impact the interest rate and cost of a loan. Lenders have to add up all of FHFA’s LLPA fees based on the loan characteristics to come up with a total price for a given interest rate on any day. The more LLPAs assessed to a file then the higher interest rates or fees for a rate will be on their loan.

Recent FHFA Announcement
FHFA, after a lot of pressure from the mortgage industry, announced the removal of the DTI LLPA change that had been postponed to August 2023. The elimination of this LLPA is a shift in the direction of providing affordable homeownership, which is the goal of Fannie Mae and Freddie Mac.

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.

Investing in an Airbnb can be a great opportunity to generate passive income. However, before jumping in and buying one, there are a few key things you should keep in mind!

Get a Realtor with Experience in Airbnb Rentals
First and foremost, it is crucial to work with a realtor who has experience in Airbnb rentals specifically. This will help ensure that you are working with someone who is knowledgeable about the local market and understands the unique needs of Airbnb operators. A realtor with experience in Airbnb rentals will also be able to provide valuable insight into factors such as pricing, occupancy rates, and the level of demand in the area.

Check for Any Laws Restricting Airbnb Rentals
Another important consideration when purchasing an investment property to operate as an Airbnb is to ensure that there are no laws or regulations in the area that restrict short-term rentals. It is important to have a thorough understanding of the local laws and regulations so you don’t end up buying a property that can’t even legally operate as a Airbnb. This is why having the right realtor is crucial because they can tell you if there are any restrictions AND if there aren’t currently restrictions, if there is a push to restrict in that area in the near future.

Speak with Your Mortgage Broker About Loan Options
When it comes to financing your Airbnb, there are a few different loan options available. Two common options for investment properties are the DSCR loan and the conventional loan. DSCR stands for debt service coverage ratio and is a type of loan that looks at the property’s ability to generate income to cover the loan payments. DSCR loans do not require tax returns or other income documents. If you want more information, see our DSCR article. A conventional loan is a traditional loan that can be used to purchase an Airbnb and typically will offer more competitive financing than DSCR, but is more document heavy and can have more restrictions if you want to put the property in a LLC.

If you’re looking at buying an Airbnb this Spring – it’s an exciting opportunity and a great investment, but make sure you do your research and make sure you’re treating it as a business decision. Approach the process with a strategic mindset. Work with a realtor who has experience in Airbnb rentals, check for any laws or regulations that may impact your ability to operate (or ones coming up), and have a plan with your mortgage broker about the right loan type. Good luck on your Airbnb journey!

Investing in real estate can be a lucrative opportunity for individuals looking to build wealth and generate passive income. However, obtaining financing for investment properties can be a challenge, especially for investors with complicated income or multiple rental properties. This is where DSCR mortgages come into play.

DSCR, or debt service coverage ratio, is a metric used to determine your ability to make mortgage payments based on the profitability of the subject property. It measures the ratio of a property’s income to its debt obligations, including the mortgage payment. A DSCR of 1.0 means that the property’s income is equal to its debt obligations (taxes, insurance, HOA, mortgage payment, etc), while a DSCR of less than 1.0 indicates that the property’s income is insufficient to cover its debt obligations.

A DSCR mortgage is a type of loan that is underwritten using the debt service coverage ratio rather than your personal income. This means that investors with complicated income or multiple rental properties can qualify for a DSCR mortgage without having to provide extensive documentation of their financial history because it is not used to qualify for the mortgage.

To qualify for a DSCR mortgage, the property’s DSCR must meet certain requirements. Typically, the minimum DSCR is 1, although this can vary depending on the investor, your history as an investor, and the property’s location and type. In addition, there are some minimum credit score requirements and typically they require a minimum down payment of 20% in many cases.

First-time investors can also qualify for DSCR loans, even if they do not have a long credit history or substantial personal income. This makes it easier for new investors to enter the real estate market and start building their investment portfolio.

Overall, a DSCR mortgage can be a useful tool for real estate investors. By using the property’s income to determine eligibility, rather than the your personal income, DSCR mortgages offer a more flexible and common sense financing option.

If you’ve been keeping up with the news surrounding conventional loans, you’ll know that Fannie Mae and Freddie Mac have changed the way mortgage rates and pricing work this year. On average, they’ve made it more expensive for the typical conventional homeowner.

One of these changes they made was to add an additional fee to any loan that had a debt-to-income ratio over 40%. The way this is calculated is by taking your total minimum monthly obligations that report to the credit bureaus (mortgage, car loans, credit cards, etc) and divide it by your gross monthly income (meaning before taxes). If that number comes out to be above 40%, then they would issue you an extra fee on your conventional loan.

However, thanks to some pressure from the mortgage industry, Fannie Mae and Freddie Mac have delayed this change until August this year. It’s proven to be a difficult thing to track and effectively apply to each loan so it’s been delayed to see if it can be effectively implemented. Our best guess is that this is something that will actually be done away with completely because their stated purpose of these changes was to help lower income homeowners. A fee for higher debt-to-income ratios would be something that directly affects those same homeowners, going against their purpose. We’ll keep you updated as more news comes out!

Relocating to a new state can be exciting and overwhelming, especially when you’re trying to buy a home at the same time. With proper planning and preparation, the process can be smooth and (mostly) stress-free! Here is a guide with tips and tricks on how to relocate and buy a home in a different state.

If you’re not familiar with what areas to look at, contact a mortgage broker ahead of time. Typically, you would think you want to reach out to a realtor, but mortgage brokers work with several realtors on a day to day basis and can connect you with the right one based on the area you’re looking in and who you might fit best with based on personalities. We can also recommend agents who are experienced at working with out-of-state buyers to help you navigate the unique challenges of buying a home in a new state.

Always be sure to get pre-approved for a mortgage before reaching out to a realtor and starting the house hunting process. This will ensure you are able to afford what you’re looking for and help determine the right areas for your budget. It will also help show you are a serious buyer for your realtor.

We always recommend you visit the new state and explore different neighborhoods before with your realtor if you can. This will give you a better understanding of the area and it’s immediate surroundings. If it’s not possible to visit in person, the realtor you select is even more crucial to ensure they know what you’re looking for and the area meets your standards. One thing you can do is use Google Maps and drive the streets on google to get a feel as well.

Make sure you select a good moving company. This is one reason it’s imperative to have a good realtor that’s experienced in out of state moves because they work more closely than mortgage brokers with identifying the right movers. If you are moving yourself and live in a place with a lot of people leaving, like California for example, you might want to consider looking at moving trucks in neighboring states if it’s convenient. For instance, if you live on the CA and AZ border, you might be able to pick up a moving truck from Phoenix cheaper than in CA if it’s convenient to pick one up from there.

Relocating and buying a home in a different state at the same time is a lot to handle at once. We’ve done it ourselves so we understand. However, with proper planning, guidance, and preparation it can be a surprisingly smooth transition. If you have any questions or want to get connected with the right realtor, let us know – we’re here to help!