If you are thinking of buying a home with a low down payment, there are some big but virtually unannounced price changes that are going on in the mortgage market.
If you have good credit but not good credit, such as a middle to high FICO score, you’re going to have to pay higher fees on a conventional (non-government) loan with a low down payment. Count on it. On the other hand, if you are among the credit elite – your FICO score is 760 or higher – congratulations: you are online for an unexpected fee discount, despite a small down payment.
What is going on? Put simply, mortgage insurance premiums on loans eligible for sale to giant investors Fannie Mae and Freddie Mac have seen a shake up this month. Applicants with lower scores and smaller down payments were hit.
For example: according to the price list of a mortgage insurer, the buyer of a home of $ 400,000 with a FICO of 660, a down payment of 3% and a fixed rate of 4
What about slightly larger down payments, like 5% ($ 20,000) on the same $ 400,000 home purchase? If your FICO is a 620, you would have paid $ 2,261 per month before the change. Now your mortgage will cost you $ 2,407 per month. If you are at the high end of the credit spectrum, with a FICO over 760, the 5% loan would have required payments of $ 1,931 per month by April 4th. This now drops to $ 1,890.
A little background here: When making a down payment of less than 20% on a conventional loan, private mortgage insurance is required, in order to limit some of the potential risk for the lender or investor. Typically, premiums are added to monthly payments. Fannie Mae and Freddie Mac are also adding their own additional fees on low down payment mortgages. The lower your credit score and the smaller your down payment, the higher the additional fees charged by Fannie and Freddie.
Mortgage insurers say they were forced to revise prices because Fannie and Freddie changed their capital requirements. “We must have ended up charging more,” said Michael Zimmerman, senior vice president at MGIC, a major insurer. The “cross-subsidization” of premium rates that existed before – where borrowers with excellent credit were charged a little more in premiums so that borrowers with low FICOs could pay a little less – has “now been eliminated”.
Fannie and Freddie officials say the revised capital requirements were necessary to ensure the companies they deal with had enough strength to handle future claims in the event of default and foreclosure. Andrew Wilson, a spokesperson for Fannie Mae, said mortgage insurance companies could have revised their rates differently, limiting the impact on lower-rated homebuyers, but they chose the opposite.
Bose T. George, managing director of equity research at Keefe, Bruyette & Woods, a leading mortgage industry analyst, says Fannie and Freddie also had choices: They could have cut their own “large” charges on a down payment. lower, lower -FICO borrowers, fees they’ve put in place since the housing crisis. “They never revised their fees, and expecting private companies to subsidize lower-rated borrowers is unrealistic,” he told me in an interview.
Aside from these internal disputes within the industry, what do the new changes in insurance premiums mean in concrete terms to you? If you have a FICO score of between 600 and above and want to make the lowest possible down payment, you will probably want to turn to the Federal Housing Administration for your financing.
The FHA offers minimum down payments of 3.5 percent and is more flexible and forgiving than Fannie and Freddie on credit problems and debt-to-income ratios. Last year, the FHA cut its own premiums, and they’re now the cheapest choice below 700 FICO.
But there is one major downside to FHA-insured loans – unlike private mortgage insurance, you usually can’t write off premium payments once your equity hits a certain threshold. So, you could end up paying monthly premiums indefinitely. It’s a real halt.
Ken harneyThe email address for is [email protected]