In the last few days, many headlines circled the internet regarding new mortgage guidelines pushed by the Biden administration. Many have made the mistake that this will result in consumers with higher credit scores ending up paying more on their mortgage than consumers with a lower credit score (I myself thought so too at first).

Many people even reached out to me for some tips on how to lower their credit score:)

But looking deeper into this, it is not correct. 

So before jumping to lower your credit score, let’s explore what has changed and how it will potentially affect you.  

First thing first

It’s not true that someone with a lower credit will pay less on their mortgage than someone with a higher credit score. I spoke to multiple mortgage brokers who all confirmed that there is absolutely no case in which someone with a lower credit score will pay less than someone with a higher credit score.

So what changed?

The new LLPA guidelines (Loan Level Price Adjustment) reduces the gap between consumers with high credit and consumers with lower credit.

The guidelines reduce the gap by raising the rates for high credit scores and lowering the rates for consumers with a low credit score. So this is reducing the gap between the two. But the end result is still that the higher credit score gets the better rate, it’s just that the difference is smaller. 

For example, let’s use a $500k mortgage on a $625k purchase price.

A consumer with a 640 credit score with the old rates would pay 7.6%* interest. With the new rates they pay only 7.3%*. 

Using the same scenario, a consumer with a 740 mortgage score with the old rates would pay only 6.3%* interest but with the new rates they will be raised to 6.6%*. 

So the 740 is paying more than he/she used to, but they are still paying way less than the 640 (6.6%* versus 7.3%*).

Here is a chart that breaks it down

Zev Spitzer, who is a senior loan officer at Cross Country Mortgage, prepared the following chart for us to showcase the differences between the old rates and the new rates. 

The example used in this chart is for a $500,000 loan amount and a $625,000 purchase price.

New vs. Old

Why are they making these changes?

These changes are pushed by the Biden administration in order to close the racial homeownership gap and bring more low-income buyers to the home buying market. Their thinking is that low income consumers usually have lower credit scores so let’s help them by lowering their rates and offsetting the loss by having consumers with high credit scores pay higher rates.  

But this is extremely unfair to the consumers who worked hard to build their credit and now they are forced to pay a higher interest rate than they deserve in order to offset the loss from higher risk borrowers with low credit scores.

Some more changes that will directly impact most borrowers

• Above 740 credit score matters: The best credit score for an average mortgage was 740 until now, meaning you did not get any incentive above 740. Now this has changed to 780, and for having a score of 760 and/or 740 you will already see an adjustment to that rate. 
• Condos: When purchasing a condo you used to be able to put down 75% Loan to Value and not be hit with a higher interest rate. This was upped to 70% – meaning by borrowing 75% on a condominium unit you will already have an adjustment.

Where it is getting better

• 2-4 unit property – you used to pay higher interest rates for a 2-4 unit apartment than a single unit. Now they will keep a 2-4 unit at the same rate as a single – this is a great help for many investors.
• Putting a bigger down payment: Putting down a bigger down payment always helped your interest rate but now it will help more than ever, especially for consumers with low credit scores. The difference in interest rate will now be more significant when putting down a bigger down payment (unless you put down as little as 5% then the adjustment shockingly becomes better! However, it’s important to consult your Mortgage lender about the other implications a higher loan can mean) 

When will this all take effect?

This is taking effect on May 1st, affecting any Fannie Mae and Freddie Mac loan (most mortgage loans), But because we don’t borrow directly from Fannie Mae and Freddie Mac, we instead borrow from a bank that eventually sells the mortgage to Fannie Mae and Freddie Mac, all banks already implemented these changes effective immediately. 

Sign the petition

If you’re not happy with these changes, here is where you can sign a petition to fight it.

I doubt anything will change but it just takes a second to sign, so why not.  

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Thank you to Zep Spitzer – Cross Country Mortgage, Chaim Weiser – The Leopard Group, And Philip Brody, for helping out with this post 

*Numbers were rounded up to the nearest number