A new policy affecting Fannie Mae (FNMA) and Freddie Mac (FMCC) loan recipients was enacted at the beginning of May. If you're looking to buy a home in the near future, your credit score could have an impact on the size of your down payment.
Some news networks are painting the change as a punishment for buyers with higher credit scores -- but is that true? Gen Z financial influencer Vivian Tu can see how this new policy might send folks the wrong message.
"So should you open up a new credit card rack up the charges and never pay your bills on time again to tank your own credit score? No. Oh my god, no."
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Tu goes on to give an easy breakdown of how the loan rates work. "It’s going to potentially change the amount that people need to pay in ‘loan-level price’ adjustments," she explains in a new YouTube video. "LLPs are upfront fees based on factors such as a borrower's credit score and the size of their down payment."
"These fees are typically converted from a flat rate into percentage points that alter a buyer’s mortgage rate," Tu elaborates. "Say your base rate is 5% [and] your LLPs amount to 1%. Your final mortgage rate [...] would be 6%."
Tu goes on to point out some of the nuances of the new policy and gives a few examples. Her summary may help those wondering if the new policy will do more harm than help.
"The changes have narrowed the gap between fees paid by folks with lower scores versus people with higher scores," Tu said.
"I understand the hope behind this change[,] credit score isn't always indicative of income," Tu points out. "[And] regardless of [...] your credit score, the new LLP HR incentivizes people to put down as little as humanly possible on their home. If [buyers] can't afford to put down 30 or more percent, [the policy] penalizes people who put down around 20%, which historically has been the gold standard.
"This means borrowers would be taking on significantly more leverage," she says, putting things into perspective. "At today's interest rates, that could mean exceptionally high monthly payments and taking on a large amount of debt that compounds rather quickly."
