It’s been all over your feeds this week – bad news is coming for buyers seeking financing. Yes, it seems it is in fact possible to knock someone out again who’s already unconscious. Just kidding, things haven’t been so bad in the mortgage space for the past month. Rates have been trending down, we are in the 5s now! Mortgage applications are up 30% week over week. People are calling us and they sound excited and hopeful about real estate. So yeah, you could say we were actually overdue for another blow.
This one is coming in the form of loan level price adjustments. These are additional fees, built into an interest rate, for mortgages based on the perceived risk level of the loan. LLPAs have always existed and are the reason that a borrower with an 800 credit score putting 30% down gets a better interest rate than someone with a 660 putting down 3%.
So what’s changing?
Beginning May 1st, the “buckets” for credit scores, loan-to-values, occupancy, and debt-to-income ratio are changing. For some the changes will be helpful, they will decrease the cost of borrowing money. For others, not so much. Here are a few of the changes that should be on your radar:
Credit Score Buckets.
This is where the changes could be perceived as positive, especially if you have a lower credit score. The penalty to you for having a score under 680 will be less. They will also make the price adjustments based more specifically on your credit score. It used to be if you hit a 740 you were golden. Now there will be improvements at 760 and 780.
Loan to Value
This is a mixed bag. The majority of borrowers have a 680 or higher credit score. If they are putting 15-25% down, pricing will be notably worse for them in May than it is now. For lesser down payments, it’s actually not bad. For example if you are putting 3-5% down with a credit score below 680, your interest rate pricing will be significantly better.
Debt to Income Ratio
Here’s where this whole thing got rude. Especially because lenders all calculate income very differently and to be honest, some are just significantly better at this complex task than others. Borrowers with debt to income ratios higher than 40% will be subject to negative loan level price adjustments come May.
There are other changes as well. Changes based on occupancy…which include some improvements for non-owner occupied properties and multi-family properties.
It seems like the government is trying to help with affordability. I make this assumption because if you have a lower down payment and lower credit score, you will get a better interest rate. This could also take into account mortgage insurance. If you aren’t familiar with mortgage insurance, this is a premium that is included in borrower’s monthly payment when they put less than 20% down. It is different than hazard or homeowner’s (those words are synonyms in the mortgage space) insurance, which protects you in the case of major hazard like fire or burglary. Mortgage insurance protects the bank against you. Since you have less skin in the game by putting less than 20% down, they consider you more of risk for default. So you pay a mortgage insurance company for insurance and that insurance would pay your loan off to the bank if you failed to do so. This is why we will sometimes see a slightly higher interest rate if you put 20% down versus 18%. Once you hit that 20%, the bank doesn’t have mortgage insurance covering their ass, I mean risk.
If you have a credit score above 720 and are looking to buy a house this year, do it NOW. I’m not kidding. Identify the house and close before May. I typically don’t pressure people like this, so look alive and take note. We have also seen a shift in the last two weeks where we are moving away from a buyer’s market and into a balanced market. It’s possible, highly possible, that we are just weeks away from a seller’s market. I did a webinar on this, check it out here.
Work with a lender who knows what they are doing on your income calculation. This will now have greater impacts than the price range you qualify to shop in (which was pretty big, but I guess people don’t care because Rocket Mortgage is still the number one lender in the country). Income calc guidelines change based on the type of pay, the type of loan program, the history of your employment and the shade of blue the sky is that day. The lender qualifying you must be well versed on these stipulations so they can maximize the credit they are giving you for each dollar earned.
Maybe put less money down. It could make sense if it pencils to a better interest rate. This requires a total cost analysis and will be specific to each borrower.
Honestly, this news isn’t as bad as everyone has made it out to be, including the drama queen in the first paragraph of this article. I’m here to keep you in the loop and sometimes getting your attention requires a little flare.