Here's How Biden's Controversial Mortgage Rule Will Affect You

In a controversial decision, the Biden administration will raise some upfront mortgage fees for homebuyers with good credit while also lowering fees for riskier borrowers.

If, for instance, you have a credit score of 650 and are borrowing 85% of an $800,000 home, you’ll pay a 2.5% fee under the new rules, whereas buyers with scores of 760 will pay .625%. Prior to this change, the less credit-worthy buyer would have paid a 3.25% fee, while the second buyer would have paid a .250% fee. (If this is all a bit much, skip to the “What This Means” section).

In other words, many risky buyers will see fee decreases, while some high-credit buyers will see fee increases. That said, it’s important to note two things. Firstly, it remains true that the better your credit score is, the fewer fees you’ll generally pay. Secondly, borrowers with high credit also saw some reductions in mortgage fees. (For a more comprehensive look, see Mortgage News Daily’s heat map table.)

The Biden administration is instituting this change, effective May 1, through the Federal Housing Finance Agency (FHFA), the independent organization that regulates federal mortgage guarantors Fannie Mae and Freddie Mac. And since most loans in the U.S. go through Fannie Mae and Freddie Mac, it will affect the majority of mortgages.

Newsweek reported that the credit-score-based LLPA changes are part of the Biden administration’s efforts to make homeownership more accessible to low-income buyers and people of color. Others have characterized these changes as redistributive, calling it a “subsidy” that benefits risky borrowers.

However, the FHFA pushed back against such claims in an April 25 press release titled “Setting the Record Straight on Mortgage Pricing."

“Unfortunately, much of what has been reported advances a fundamental misunderstanding about the fees charged by the Enterprises, and why they were updated,” FHFA’s Director Sandra Thompson wrote.

The FHFA ‘Sets the Record Straight’

Thompson clarified that “Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” adding that the changes don’t “represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers.” The new fees, she adds, are now “better aligned” with long-term financial performance and risk.

While it could be true that the fees are simply a better reflection of risk, they have generally reduced fees for lower-credit-score borrowers while increasing fees for those with higher credit scores.

Whatever the reason behind the changes, the FHFA said that they came to the decision after a “comprehensive review” of Fannie Mae and Freddie Mac’s pricing framework in 2021.

“The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time,” Thompson wrote.

Although some have attributed the credit-score-based changes to the first goal, Thompson explained that the FHFA is helping underrepresented buyers by eliminating upfront fees for low-income individuals. For example, the agency is eliminating fees for first-time buyers under a certain income.

"The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances," Thompson wrote.

When Cheapism reached out to the FHFA for comment, a spokesperson directed us to their press releases.

The Political Response

The Conservative Take

The most vocal response to the FHFA’s changes has been on the right, where pundits have criticized the credit-score-based shifts as unfair and punitive.

“So, without any vote in Congress, the Biden administration has just introduced a rule — not a law, a rule — that will punish Americans who've tried to do the right thing, punish people with high credit scores,” Tucker Carlson said on his now-defunct Fox News show. “The people with high credit scores will pay higher fees on their mortgage payments to subsidize people who haven't maintained good credit.”

The problem with Carlson’s analysis and similar takes is that they misrepresent the FHFA’s policy. 

The FHFA has denied claims that higher-credit-score borrowers are subsidizing buyers who maintain good credit. Rather, the FHFA said that the changes were implemented to “strengthen the safety and soundness” of Fannie Mae and Freddie Mac.

Finally, it’s not true that people with high credit scores will pay higher fees than buyers with low credit. In absolute terms, buyers with higher credit scores will continue to pay less in upfront fees. Higher-credit-score borrowers will only pay higher fees relative to the fees they were paying before the restructuring.

The Progressive Take

Newsweek framed the credit score changes as the Biden administration’s attempt “to close the racial homeownership gap and get more first-time and low-income buyers through the door.”

Although the FHFA hasn’t explicitly linked the credit-score-based changes to any political aims, it could make homeownership more equitable.

According to a FinMasters analysis, the average white person has a credit score of 727, while Black and Hispanic Americans have average scores of 627 and 667, respectively. Data also show that there’s a significant racial homeownership gap between white communities and communities of color.

Given that the new LLPA structure reduces upfront fees for people with lower credit scores, the FHFA’s policy might expand access to homeownership across race and class.

Gallery: 20 Things You Can't Do With a Low Credit Score

What This Means For Homebuyers

Congratulations! You’ve made it through a mess of head-spinning housing data to the best part: the summary. While we haven’t covered all the changes, the most notable ones are:

• A general increase in upfront mortgage fees for borrowers with scores of 680 and above.

• A general decrease in upfront mortgage fees for borrowers with scores of 679 and below.

• Borrowers with at least a 40% debt-to-income ratio will see fees increase (this change has been postponed to Aug. 1).

• An increase in upfront fees for cash-out refinance loans.

• Zero upfront fees for some first-time and low-income homebuyers.

In Brief

Effective May 1, the FHFA will eliminate fees for some first-time buyers and introduce a new LLPA matrix. Relative to the prior fee structure, borrowers with better credit scores will see an increase in upfront mortgage fees while buyers with lower credit could see a decrease. However, the general structure remains the same: The better your credit score is, the lower your fees will be.

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