Broker Check
Mortgage Fees Are Changing for Homebuyers

Mortgage Fees Are Changing for Homebuyers

| June 11, 2023

Today’s increase in housing costs has made it steadily more difficult for those with lower and middle incomes to purchase homes, especially if they’re first-time homebuyers. Fortunately, Fannie Mae and Freddie Mac — two of the leading mortgage guarantors in the US — have adjusted their loan-level price adjustment (LLPA) matrix in order to make access to housing more equitable. 

With that in mind, if you are in the process of purchasing a home or obtaining a mortgage, here’s a quick guide to mortgage fee changes and how they may impact you.

What’s an LLPA?

If you’ve ever gotten a mortgage, you know that the homebuying process is full of unexpected fees, one of which is the loan-level price adjustment. The LLPA is a fee that lenders assess based on risk and a complex calculation that takes the following into account:

  • Your credit score
  • The size and type of the home
  • The value of the loan relative to the value of the home
  • Your debt-to-income ratio
  • The amount of your down payment
  • Whether the loan is for a purchase, refinance, or cash-out refinance

In most cases, you won’t have to pay the LLPA immediately, and most lenders will be able to include the amount in your loan.

How Are Mortgage Fees Changing?

Before explaining how their LLPAs are changing, you may be wondering just what exactly Fannie Mae and Freddie Mac even are. These two names are companies — in particular, government-sponsored enterprises (GSEs) — that were both chartered by Congress in 1938 and 1970, respectively.

Freddie Mac and Fannie Mae’s changes to their LLPA calculations took effect on May 1st of 2023, lowering the penalties for those with lower credit scores and smaller down payments. Of course, if you have a higher credit score, you’ll still have a lower LLPA than someone with a lower score.

In all the buzz surrounding these LLPA changes, some people are claiming that both Fannie Mae and Freddie Mac have begun overcharging buyers with higher credit scores and down payments to effectively subsidize those with lower down payments and scores.

However, that view does not take mortgage insurance into account. Any buyer with a down payment of less than 20% must purchase mortgage insurance, which shifts some of the risk away from Fannie Mae and Freddie Mac. Consequently, these two enterprises can charge lower LLPAs, as mortgage insurance denotes that the buyer poses less of a risk.

Homebuyers must purchase their own mortgage insurance, so when factoring mortgage insurance into the equation, there’s a consistent pattern: Those who pose a greater risk pay more, and buyers who pose less risk pay less.

How Does the Change Affect Housing Access?

Having a lower income doesn’t necessarily mean you’ll have a lower credit score, but those with lower incomes are generally more likely to have lower credit scores, too. That’s because if you struggle to pay bills, you may fall behind on payments or accrue debt, which are both circumstances that may lower your score. 

Given that the fee changes lessen the penalty for those with lower credit scores and lower down payments, they help keep housing more affordable and accessible for all. Bear in mind, though, that those with high credit scores will still pay less in terms of upfront fees. If you have a credit score of 740 or above, your fee could be 0.375% of the loan’s balance or potentially even lower.

These changes also only affect loans guaranteed by Fannie Mae and Freddie Mac, but that’s still a sizable portion of mortgages. In 2019, about 42% of mortgages were guaranteed by these two companies, and during the pandemic, that number rose to about 60%.

While they both guarantee mortgages, the two companies aren’t lenders. Instead, they purchase mortgages after they are offered by lenders. By doing so, lenders have more capital that they can use to offer more mortgages.

Start Your Journey Toward a New Home

If you’re considering buying a home, and especially if you’re a first-time homebuyer, the process of applying and qualifying for a mortgage can be daunting. However, an experienced financial advisor can help you streamline the process while making sure you get the best deal possible. 

At Good Life, our advisors are proud to help people like you achieve their financial goals. If you’re looking for guidance on mortgages, we encourage you to reach out to us for a free consultation. We’ll ask you a bit about yourself, your current financial situation, and your goals, and you can interview us to see if our helpful advisors are the right fit for you.