We want to alert you to big mortgage changes coming that will affect home buyers and sellers soon. Effective May 1st, all loans sold and secured through Fannie Mae and Freddie Mac will incur significant charges in three key areas. What this means is loans will need to be funded sometime in April to avoid these extra charges. The extra charges are in addition to rising interest rates.
Credit Score
The top tier credit score used to be 740. That is changing to 780. For borrowers with less than a 780 credit score there will be a premium added to the yield. The lower the score, the more premium will be added. The increased yield can lead to either additional closing costs or higher interest rate, or both.
Amount Down
Borrowers putting 30% or more down with a 760 credit score escape the amount down premium. Pretty much everyone escapes this premium with 70% down. As you can see from the chart, the credit score and amount down are interrelated.
Debt to Income Ratio
Borrowers whose total debt to income including the home loan exceeds 40% will also pay a premium of .25% to .375% unless they are putting 40% down.
As an example, a borrower with a 740 credit score putting 20% down on a $400,000 loan will pay an extra $1,500. The same borrower with a debt to income ratio of over 40% will pay an additional $1,500 for a total of $3,000 in extra costs. That money must come from somewhere. Either the buyer or seller must pay it, or it may get added to the rate.
Other Loan Types
People buying condos, second homes, investment properties, and other types of loans may also see some price increases.
Good News for FHA and VA Loans
There is some good news. FHA and VA are lowering their costs to borrow. The net result is we predict more buyers will utilize FHA and VA when they can. Sellers will learn to appreciate this too because FHA and VA buyers may have an easier time qualifying for a loan under the new guidelines. Sellers should not be afraid of these loans given the new lending landscape.
There are some downsides to FHA. The MIP (Mortgage Insurance Premium) of 1.75% is paid upfront. Not over time. For those with less than 5% down, the MIP never goes away, so FHA buyers should consider putting 5% down instead of the minimum 3.5% down.
VA buyers will also save by putting 5% down versus the minimum 0% down.
Big Mortgage Changes Coming-Overall Market Impact
Conventional costs and interest rates are going up. FHA and VA re lowering costs which means those loans will gain market share and increase in popularity. Look for more buyers to ask sellers for concessions and closing costs.
Strategy
If you are a buyer or seller, it would be best to get your property under contract by about March 15th. Any time after that costs will go up. This will affect home buyers and it could ultimately affect home sellers too depending on demand.
The cost of waiting has never been greater. Not only are the costs of borrowing going up, but the actual rates are too. This is a double whammy for buyers. The triple whammy is rental rates are also skyrocketing, so they have no protection against rising housing costs. The only way renters can protect themselves is to purchase and lock in those rates. The big mortgage changes coming will force buyers to pay more for their loan or consider options to reduce costs.
If you are borrowing conventional, do so by March 15th. Otherwise, consider FHA or VA after that date, but keep in mind there are loan limits by county for FHA.