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The news is awash with articles on The Federal Housing Finance Agency’s new loan-level price adjustment (LLPA) matrix all discussing how those with higher credit scores will now pay more in LLPA fees compared to their counterparts with lower credit scores. Some articles even claim the fee increases will amount to borrowers paying hundreds of dollars more per month.
While these assertions may grab headlines, wallets and eyeballs, the fee pricing matrix is a bit more… well, like a roulette table. Depending on how one cherry-picks the data, the losers can quickly go from winners to losers, or vice versa. In other words, whether one pays more in fees varies dramatically depending on the size of the down payment and the borrower’s credit score.
For example, under the new pricing-matrix all borrowers, regardless of their credit score, will now pay less in fees if their down payment is less than 5%. Moreover, for those borrowers with a credit score of 780 or greater they will either receive a reduction in their fees or have no increase at all.
The only exception to this involves those unfortunate 780+ credit score borrowers with a down payment of 15%, but less than 20%. For some bizarre reason, like a remote island, the matrix penalizes those 780+ credit score borrowers putting down 15%, but less than 20%.
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Welcome to the matrix. Which down payment are you going to choose? The larger or the smaller one? Take a borrower with a lower credit score of 680 putting down 30%. That borrower will have a fee increase. Whereas a fee decrease occurs if the same borrower puts down less than 30%. I know, it makes no sense, right?
Things get even more otherworldly in the matrix when you compare the credit score winners to the losers (i.e., those with good credit versus those with bad). For example, assume an average home selling price of $430,000 and two borrowers with credit scores of 740 and 640. If the 740-credit score borrower puts 20% down the borrower will have a fee increase of $1,290, whereas the 640-credit score borrower putting only 5% down will see a fee reduction of $3,574.
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Here the winner (high credit score) is losing, and the loser (low credit score) is winning. But things can quickly flip-flop. For example, assume the winner now has an even higher credit score of 780, and puts 25% down. Now the winner sees a fee decrease of $806, whereas a 680 credit-score borrower, putting only 5% down, will see a fee increase of $511. Who’s losing now!
As previously mentioned, everyone wins by putting less than 5% down. The 780+ credit score borrower would see a $2,688 fee reduction, and the 680-credit score borrower a $1,613 fee reduction. It is almost like the matrix is encouraging borrowers to put less than 5% down.
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If any fee increases do occur, they are unlikely to amount to hundreds of dollars a month as some have suggested. Taking the same $430,000 selling price example – and a 30-year mortgage at 6.5% APR – regardless of where one lands on the matrix, the fee increase will be less than $20 per month.
Are many borrowers across the country with good credit scores going to see a fee increase at the expense of their lower-credit furry friends? Absolutely, but the exact opposite will also frequently happen. As this article illustrates, one’s fate ultimately depends on where the dice land. Welcome to the matrix.
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Larry Gorman is a professor of finance at the Orfalea College of Business at California Polytechnic State University and the author of the textbook, “Mastering the Fundamentals of Finance, Building Skills and Intuition” (Cognella 2021).