By Matt Martin, Branch Manager NMLS# 296965
Motto Mortgage Cascades
First published in the Source Weekly
Is it true? “Mortgage rate changes to benefit those with lower credit scores.”
Have you read a headline like this recently and scratched your head thinking, how could this be true? If so, you’re not alone. This would be a major shift in the way we review and rate credit scores— and it’s simply, not true. As a mortgage broker dedicated to helping people navigate the complex world of home financing, it is essential to shed light on this false narrative and provide accurate information.
The truth about new adjustments for all borrowers
It is true there are changes to loans regulated by the FHFA (Fannie Mae and Freddie Mac) which comprise the majority of mortgage loans. The adjustments are known as Loan Level Price Adjustments (LLPAs). The new table went into effect on May 1, 2023. More borrowers will have an adjustment including borrowers with credit scores above 740 that previously did not have an adjustment. What has been portrayed is borrowers with lower credit scores will receive better rates. This is simply not correct. What did occur is borrowers with lower scores saw a reduction, not elimination, in the adjustment to their rates. Lower credit score borrowers still have adjustments that are larger than higher score borrowers. The other changes that occurred are new adjustments for borrowers with credit scores between 740-780. Last week one small component of the adjustment table, the debt to income adjustment was eliminated. Some media sources incorrectly reported this as the entire adjustment table was retracted. You can confirm and access the adjustment table direct from the source yourself – https://singlefamily.fanniemae.com/media/9391/display
Credit management is more important than ever
What is important to know about this change is that, now more than ever, paying very close attention to your credit score is critical. The FHFA adjustment table has 20 point brackets and a 40-60 point difference will translate to thousands of dollars of difference in upfront loan costs and/or interest paid over time. Sometimes even 1 point can have a significant impact on your loan options and costs. Borrowers should be aware that the mortgage industry uses a different score model than what you may receive from consumer based resources. Several months before you want to finance a new home you should obtain a mortgage credit score to determine if there are opportunities to improve your credit score.
Opportunities to improve credit scores
An area where I consistently see opportunity for borrowers to improve their credit score is with the management of credit cards. While the credit score formula is not public, from experience I have seen most borrowers’ scores drop noticeably when they have any one credit card reporting over 20% of the credit limit. The closer to the limit, the more impact on the credit score. Credit card balances typically only report once per month and frequently on the statement date. Borrowers that pay off their credit cards once each month may still be impacted by a higher balance being reported for the month because they pay down their balances after the reporting date. A strategy for borrowers that have the ability to pay down credit cards is to pay the cards down multiple times during the month.
Bottom line?
We can’t always believe what we read. With something as important and life-changing as home ownership and your financial future, be sure to do your due diligence and learn what is going to be most beneficial for you and your unique situation. Having a trusted lender is a great first step.