We’ve been hearing lately that people think due to recent government changes, home buyers with lower credit scores will soon be getting better interest rates and mortgage terms than home buyers with higher credit scores. This is just not accurate. Here is what’s happening…
Whenever a potential home buyer is shopping a mortgage there are risk factors or Loan Level Price Adjustors (LLPA’s) which determine what each individual qualifies for. Things like credit score, loan-to-value (or the amount of downpayment), and debt-to-income ratios (amount of income coming in compared to the amount going out to pay debt) all come into factor.
The Federal Housing Financial Agency (or FHFA) noticed that home buyers with lower credit scores were paying a significantly higher interest rate than people with higher credit scores. They then stepped in and created regulations to lessen the gap. Therefore, home buyers with lower credit scores now have slightly better rates than what they were previously offered. However, in order to subsidize that they lessened the incentive or benefit that a home buyer receives for having a higher credit score. You still get rewarded for having a higher score and lower debt-to-income ratio, but the reward isn’t as much as it once was.
Once again, those with higher credit scores are still receiving better mortgage interest rates/terms!
This will primarily affect the Conventional Mortgage borrower. FHA and VA mortgages do not follow this rule. In fact, most lenders have known this was coming and have already adjusted their rates to account for those changes over a month ago.
For any pre-approved home buyer, we recommend they contact their lender to make sure these LLPA’s and recent .25% Fed rate hike doesn’t affect their pre-approval.