Thanks to the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac – the cost of a loan just went up.
A few years ago the GSE’s introduced Loan Level Pricing Adjustments (LLPA’s) and an ‘Adverse Market Delivery Charge (AMDC) to help ‘offset the risk’ of lending to borrowers with lower credit scores. Those LLPA’s first affected only those with credit scores under 700. Over time that minimum impact number rose to 720, then 740 and now no one is immune to these profits tactics employed by the GSE’s.
Anyone that wants a conventional loan will now have to either pay .25% (one quarter of one point) or pay a slightly higher rate to absorb the cost of this new program from the GSE’s that have gotten so much of our tax dollars over the past few years.
While this may not seem like a significant charge, it is important to note that the additional cost is equivalent to an increase in the cost of the mortgage backed securities by a significant amount. In other words – the GSE’s are artificially increasing mortgage rates and distorting the mortgage backed securities market. The net result is higher rates and more cost for borrowers.
While these changes do not officially take effect until April 1, 2011 most banks and investors are implementing the change effective immediately as there is a long cycle from approval to closing and then to the sale of a loan to the GSE’s so these changes are practically in effect right now.
Here are some examples of the practicality of these LLPA’s and the AMDC:
Even if you have a perfect credit score of 850 – you will still be hit with the .25% charge and will therefore either have to pay that quarter point at closing or likely pay a higher rate to absorb that cost.
If you have a 719 credit score and you are putting down 20% you will be hit with an ADDITIONAL .75% LLPA on top of the .25% AMDC for a total of 1% (or 1 Point). The effect of these charges equate to an interest rate that is .25% higher than someone with a credit score above 740.
As you go down the scale, you will find that LLPA costs rise to 2% or even 3% plus the .25% ADMC.
So what can a borrower do to minimize the impact of this change?
First of all, no one closing a conventional loan will be able to avoid the ADMC regardless of credit score or down payment. However, it is easy to see that maintaining or improving your credit score can help minimize the cost of the LLPA charges. For example: n a $200,000 loan, you could save $1000 just by getting your score from a 719 to a 721.
Attempting to adjust your credit score without the help of someone who understands this process is very difficult. Consumer credit report sites typically do not give FICO scores for their credit monitoring services. Often times they substitute the true FICO scores, used by banks to qualify someone for a mortgage, with a close approximation. Those numbers can differ from someone’s actual FICO scores by a considerable amount. Therefore, anyone looking to buy a home should speak with a mortgage professional as early in the process as possible, have their credit pulled and work on a plan, if necessary, to increase their credit scores to save money.
Now more than ever, having that plan and implementing it will be an important part of your home buying process.
One other way to avoid some of these charges is to borrow using an FHA, USDA or VA loan. As these programs are not typically purchased by the GSE’s, they do not have the same pricing adjustments. You will need to work closely with a mortgage professional who can help you determine the best approach to your purchase or refinance by going over the numbers and helping you make an informed decision as to the best approach to help you meet your goals.