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  • Doug Oosterhart, CFP®

What’s the Deal With the New “Mortgage Tax”?

Some people have suggested skipping credit card payments intentionally to lower your credit score, in response to changes in the mortgage industry.

The changes are related to Loan Level Price Adjustments (LLPAs), which are risk-based fees assessed to mortgage borrowers using conventional mortgages. The fees vary based on loan traits such as loan-to-value ratio (LTV), credit score, occupancy type, and number of units in a home. Lower credit scores and higher LTV ratios result in higher percentage-based fees, as these loans are deemed riskier to lenders.

Some posts even say, "620 FICO SCORE GETS A 1.75% FEE DISCOUNT" and "740 FICO SCORE PAYS 1% FEE."

Although these changes were announced in January, now that we are closer to the "start date," it's starting to make more headlines. In fact, some lenders have already begun to implement the changes weeks ago.

Let's break this down.

Simply put, borrowers with lower credit scores that also have higher loan-to-value ratios (smaller down payments), pay a higher percentage-based fee as that loan is deemed riskier to the lender.

So what are the changes that occurred?

For a home buyer with a sub 640 credit score that puts 20% down on a home, their fee would be about 0.375% lower than it was before the changes. Put another way, their fee used to be 3.25% and now it is 2.875%.

For a home buyer with a 750 credit score also putting 20% down on a home, their fee would be about 0.75% higher than it was before. Put another way, their fee used to be 0.25% and now it's 1%.

So, it's not that people with lower credit scores are paying a lower dollar amount or even a lower percentage for the same loan as a borrower with a higher credit score.

Comparing a lower credit vs. a higher credit borrower is the wrong comparison to make in general here. The correct comparison is to compare what a higher credit borrower used to pay vs. what they will pay with the changes. That number is higher.

In contrast, a lower credit borrower will pay a lower amount and percentage for a loan relative to what they would have paid under the previous fee structure.

At the end of the day, if a borrower has a higher credit score and lower LTV (higher down payment), they pay lower fees than someone with a lower credit score and higher LTV (lower down payment).

Shows a chart of outright LLPAs for various credit scores and LTVs
Outright LLPAs by FICO Score and LTV [Source: Mortgage News Daily]

Why are people upset about these changes?

The changes have sparked debate, with one side arguing that they will make home ownership more affordable for those with lower credit scores, while the other side believes that borrowers with higher credit scores should not have to subsidize those with weaker credit profiles. Unfortunately, the media has not provided all the facts, so it's important to dive deeper into what's going on.

According to Mortgage News Daily:

"Fannie and Freddie technically have a "mission" to promote affordable home ownership."

Good sources for more information include:

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