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Published: May 04, 2023 4 min read
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Closing on a mortgage just got a little more expensive for a lot of homebuyers.

The Federal Housing Finance Agency (FHFA) implemented changes Monday to the fee structure of conventional mortgages guaranteed by Fannie Mae and Freddie Mac, effectively lowering the fee gap between borrowers with high credit scores and those with low ones.

The change is part of a government initiative to make homeownership more affordable to underserved communities and first-time homebuyers, but critics say it disadvantages middle-income borrowers who are more financially prepared to buy a house — and less risky to lend to. On May 1, the day the new fee structure went into effect, a group of financial officials representing 27 U.S. states sent a letter to President Joe Biden and FHFA director Sandra Thompson asking for it to be scrapped.

While low-income borrowers and those with credit scores below 680, as well as first-time homebuyers, will likely see lower monthly costs going forward, the changes could also make it harder for borrowers with good — but not great — credit and income to purchase a home. Fees also increased for borrowers who make larger down payments, those who apply for a cash-out refinance and those who buy a second home.

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“The hope is that this helps ease the affordability crisis in this country,” Bess Freedman, chief executive officer at New York brokerage Brown Harris Stevens, says. Still, she adds, “hearing that one may be in essence punished for having good credit could pose yet another psychological and financial barrier,” to homeownership.

"There is already a lot of fear about making any big purchase in this environment, Freedman says.

There are a number of variables at play, including individual borrowers' loan type and loan-to-value ratio. But in a nutshell: the higher your score and the bigger your down payment, the more you may have to pay. Under the new fee structure, a borrower with a 740 credit score and a 15% down payment would pay 1% in fees. On a $350,000 loan, that comes out to $3,500 on top of the loan balance. Under the previous fee schedule, the same borrower would pay a 0.2500 fee, or $875.

FHFA fees, also called loan level pricing adjustment (LLPA) fees, have been a part of conventional loan lending since 2008, and are designed to ensure the “stability and soundness” of Fannie Mae and Freddie Mac, two U.S. government-sponsored mortgage companies.

They're referred to colloquially as "upfront fees," though in practice, their cost is usually baked into the interest rates homebuyers pay, and consequently, their mortgage payments.

Homebuyers with good credit still pay less than “riskier” borrowers under the new structure, according to Genevieve Dukes, head of mortgage partnerships at the online real estate firm Opendoor. But for middle-income buyers, many of whom are already struggling in today’s high-interest rate environment, “this could reduce affordability … at a time of instability,” she says.

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