Starting Today, Borrowers With High Credit Scores Penalized While Low Credit Score Home Buyers Are Enabled

Mindy Cohn

A new mortgage lending program set to begin today will create a new matrix where borrowers with high credit scores will face higher mortgage fees than before, while borrowers with low credit scores will now pay less in mortgage fees.

Starting May 1, the new schedule of upfront mortgage fees backed by Fannie Mae and Freddie Mac will be based on a system and divided into more than 80 categories based on several components, including the borrower's credit score, size of the down payment, and other factors. The Federal Housing Finance Agency (FHFA) claims these changes aim to create 'equitable and sustainable access to homeownership.' However, many see this as the high credit score borrowers being charged to subsidize the fees of those with lower credit scores.

The May 1 changes affect borrowers with solid credit histories the most. 

Under the revised fee structure, a borrower with a 740 FICO credit score and a 15% to 20% down payment will receive a 1% surcharge, reflecting – a .75% increase compared to the previous surcharge of .25%. 

Buyers with credit scores of 679 or below will have discounted fees, allowing more favorable mortgage rates for those less able to make the payments.

Those who are not affected by the change include borrowers taking loans backed by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), and the U.S. Department of Agriculture (USDA). 

Many in the mortgage business- not to mention the potential borrowers themselves, continue to express that penalizing borrowers with outstanding credit scores defeats the presumed purpose of focusing so keenly on maintaining an excellent score. Rewarding borrowers with lower credit scores is being toted as blatantly unfair.  

The National Association of Realtors (NAR) has come out against this fee structure, advocating for FHFA to maintain affordability for all homebuyers. The NAR points out that the new fee structure could hurt some buyers at a time when affordability remains challenging for so many.

And yet, despite the new fees resulting in borrowers with higher credit scores getting less of a break than in the past, credit scores remain the most important component in setting a mortgage rate. The lowest fees on the new fee schedule still go to borrowers with high credit scores, and although mortgage fees might have become less generous, there is little to be done about it. 

At the end of the day, a borrower will still receive the best fee for maintaining a high credit score and making a larger down payment. With hindsight, though, he would have gotten a lower fee before the new May 1 fees kicked in.

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