New pricing charges in the process of being implemented by Fannie Mae and Freddie Mac as part of the risk-based fee they factor into mortgage pricing will raise the cost of credit for most borrowers -even those with excellent credit scores. While these changes are slated to take effect April 1, most lenders have already levied new cost adjustments into their pricing to insure their loans are covered for eventual sale.
The litmus for what is considered excellent credit has been continually raised over the past few years, increasing from 700 to 720 and, over the past year or so, to 740. Although credit score ratings have long been used to balance out pricing and determine which loan options are available to a given borrower, we have not previously seen borrowers with excellent ratings penalized in pricing. The new risk-based pricing matrix marks a departure from past models and, henceforth, all borrowers will incur a fee for any loan-to-value ratio (LTV) above 75%.
The new, risk-based pricing model favors borrowers with 25% or greater down payment money and extends to those looking to refinance. Previously, borrowers with excellent credit scores did not see adjustments in rate pricing at LTVs of 80% or even higher. The new fee increases will range in cost from .25 to 3% of the loan amount. Borrowers with less than 25% down and excellent credit scores of 740 or higher will see loan costs increase by .25%, or $250 per $100,000 loan increment. These fee increases will either be paid for out-of-pocket or covered by a slight increase to the mortgage rate.
Prior to recent risk-based fee increases, borrowers with LTV ratios greater than 75% and credit scores of 720 had no cost or "hit" in fee. Lower scores suffered a bit, but not overly unless credit was really poor. Today that same borrower with a 720 to 739 FICO score would incur a cost of .5% or $500 per $100,000 loan increment. If their LTV were between 70% and 75% their loan would be hit with a .25% fee. No cost or hit would apply for a loan-to-value ratio lower than 70%.
Those borrowers with lower credit ratings and who lack large down payments or equity in existing homes will suffer significantly increased loan costs. As an example, for LTVs above 75%, the fees that apply for FICO scores ranging from 700 to 719, 680 to 699 and 660 to 679 will be 1%, 1.75%, and 2.5% of the loan amount, respectively. On a $400,000 mortgage, these risk-based costs would range from $4000 to $10,000.
Although good credit has always been extremely important, new, risk-based pricing fees make it essential. Borrowers should do everything possible to maintain high credit scores. This includes keeping month-to-month credit card balances within 30% of a given card's assigned limit, being current on all payments, and clearing off any erroneous late payments posted with the credit repositories. Borrowers should avoid successively closing and opening new credit cards as this has an adverse affect on FICO scores. Presently, fewer than half of all borrowers have FICO scores above 740.