New fee structure on May 1 will make mortgages cheaper for some and pricier for others

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• Borrowers getting a conventional mortgage will be subject to a new pricing structure starting May 1.
• Fees are dropping for some borrowers making lower down payments, while rising for those putting more down.
• Industry leaders have pushed back against these new rules, citing both affordability issues for borrowers and compliance concerns for lenders.

Starting May 1, 2023, some borrowers will pay more for their mortgages thanks to a new rule from the Federal Housing Finance Agency regarding loan-level price adjustments, or LLPAs.

The changes will update the current fee structure on the majority of loans originated by mortgage lenders in the US.

What's changing on May 1? New mortgage pricing structure

May 1 is the official implementation date for the FHFA's new LLPAs, though many lenders have already started using the new pricing. 

Any borrower getting a conventional mortgage backed by Fannie Mae or Freddie Mac will be impacted by the changes. Government-backed loans (like FHA mortgages), jumbo loans, and other non-conforming loans aren't impacted.

Exactly how much you'll pay under the new pricing structure depends on your credit score and how much you put down.

In many cases, borrowers will be charged higher fees than they previously would have paid. A borrower with a 700 credit score and a 20% down payment previously would have paid an upfront fee equal to 1.25% of the loan amount — $3,750 on a $300,000 loan. Now, their fee has been raised to 1.375%, or a total of $4,125 on a $300,000 loan.

But some borrowers stand to benefit from this change thanks to a reduction in their fees.

For example, a borrower with a credit score of 780 or higher who puts 3% down will pay a fee equal to 0.125% of their loan amount. Prior to these fee changes, that same borrower would been charged a fee equal to 0.75% of the loan amount. On a $300,000 loan, that's the difference between a $375 fee and a $2,250 fee.

You can see the full new LLPA tables on Fannie Mae's website. The old tables, which will no longer be used after May 1, can be seen here.

Not everyone is thrilled about the new pricing structure. In an April 20 statement, the National Association of Realtors asked the FHFA to walk back these changes.

"NAR continues to urge FHFA to rescind this measure that is unnecessary given their current financial strength and the affordability concerns plaguing homebuyers nationwide," the statement said.

Are those with higher scores being charged more to pay for low-credit borrowers?

Some have argued that the FHFA is using fees charged to borrowers with high credit scores to subsidize lower fees for those with poor credit. But on Tuesday, FHFA Director Sandra Thompson released a statement calling this a "fundamental misunderstanding" of the fees and why these changes were made.

"Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less," Thompson said. "The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment."

While fees have generally been reduced for borrowers with lower scores compared to the old fee structure, those with low scores will still pay higher fees than those with high scores.

Thompson goes on to argue that because it's been a while since the pricing structure has been reviewed, it was due for an update. The new structure, she says, "will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks."

In some cases, borrowers with high scores and large down payments may pay more in fees than borrowers with high scores and lower down payments. But as Thompson notes, borrowers with low down payments will also have to pay for private mortgage insurance, raising their overall costs.

DTI fee changes coming August 1

Another fee change is set to go into effect on August 1, after its implementation was postponed following pushback from the mortgage industry. This change would add an upfront fee for some borrowers with a debt-to-income ratio (DTI) above 40%. DTI refers to the relationship between how much a person earns and how much they pay toward debts each month.

Many industry leaders have spoken out against this particular rule, urging the FHFA to reconsider. They argue that DTI isn't a strong indicator of risk, and that actually implementing the rule would be tricky for lenders.

In a February 3 letter to Director Thompson, the president and CEO of the Mortgage Bankers Association, Robert Broeksmit, wrote that "an LLPA tied to DTI ratio poses a multitude of operational issues and subsequent quality control concerns for lenders."

Because a borrower's DTI can fluctuate throughout the mortgage approval process, the pricing or rate a borrower is given could change during this time as a result of the new DTI rule. This could create compliance concerns for the lender and potentially delay the closing process.

"MBA believes the DTI ratio LLPA is unworkable and should be removed," Broeksmit wrote.