I had to put my Gemini investigator hat on when I heard that mortgage fees were going up on May 1.
My brother’s wife sent me this TikTok, which, like most of what I have seen about this story, did not paint the full picture.
Heck, it didn’t even create a decent coloring book page!
But when I did some research, I got less angry.
I realized that if more people understood the actual facts about the changes and weren’t just paying attention to the headlines, political wordsmithing, and click bait soundbites, they might be less upset about the changes.
Why is the May 1 Mortgage Fee Increase Happening?
Mortgage lenders are not to blame
The federal government (NOT the President) is mandating these changes.
Also, lenders don’t get a say in following these new rules.
Here is why…
Lenders don’t like to keep your mortgage on their books.
The longer a lender keeps your mortgage, the riskier it is for them.
If you stop paying your mortgage somewhere in the next 30 years…
Well…
They would be screwed.
Additionally, if they have their money tied up in your mortgage, they can’t lend their money to anyone else.
So, mortgage originators make their money by selling their loans. And one of their biggest customers is the government.
Once the government buys these new loans, they then bundle up a bunch of loans. They sell those bundles to investors who could be other banks who will now take on the job of “holding” that loan till the borrower pays it off.
Now the government has money again to buy the next batch of new mortgage loans that have just been originated. And the cycle begins again.
Real-world example
Think of it this way…
If you loaned a friend $1,000 – would you rather that friend continue to pay you little by little for the next five years?
OR would you rather sell the loan to the government for $1100…
pocket your $100 profit, then go out and lend that same $1000 to another friend and repeat that same process 20 more times in the next year?
In order for the government to back or buy a loan, there are certain stipulations that the originating lenders have to follow. i.e., credit score, debt to income ratio, proof of ability to pay.
Another layer of rules is the fees that must be charged in association with that loan type.
If a lender does not follow ALL the rules set by the government, that loan is not sellable to the government.
So lenders have to follow the rules set forth by the feds for loans they plan to sell or get insured by the government.
What is changing exactly with the mortgage fees?
Borrowers who have a credit score of 680 or higher or place a down payment of 15% or higher will pay higher fees for their mortgage compared to the current fees.
Why are these borrowers being penalized for being in a strong financial position?
The idea is to increase access to homeownership by reducing the fees for people with lower credit scores and lower down payments.
The increased fees from highly qualified borrowers will cover the reduction of fees for borrowers with lower credit scores and down payments.
So essentially the fee structure is being recalibrated in order to penalize lower credit scores and lower down payments LESS and make the system more equitable.
These fees are NOT your interest rate.
Interest rates are not changing.
You still will be rewarded with a lower interest rate if you have a higher down payment and higher credit score. So, your payment over the life of your loan will be minimally impacted by the changes.
Fees are separate and are a percentage of the loan you want to get. And these fees will be paid upfront as part of your closing costs.
The highest fee increase will be seen by people placing a down payment for 15% or more.
The full chart of the fees is here if you want to look.
But what was more helpful to me was seeing articles with examples of the fee before and after the May 1 changes. This article shows a few great examples.
The numbers show that highly qualified borrowers will see slight increases in their fees. And less qualified borrowers will see significant decreases in their fees.
What does the mortgage fee change mean for you?
Loan Type
Most loans originated in the US are either FHA loans or Conventional loans.
FHA loans are backed by the government. Conforming conventional loans can be sold to the government.
So this change will impact regular everyday home buyers like you.
All lenders will be charging the same standard fees, so you can’t avoid this fee increase if you plan to use a regular mortgage to buy your house.
Credit Scores
For people with a 679 credit score or below, closing costs will be much lower.
If closing costs are lower, buying a home becomes more affordable and more accessible to more people.
The example in this article shows that a borrower with a 659 credit score paying 25% down would need about 3.7K less in closing costs to buy a $300,000 house.
That is BIG reduction in fees.
Buyers in Expensive Markets
If you are in an expensive market like NY or California, a million-dollar house is quite normal.
Because fees are charged as a percentage of the loan amount you want to borrow, if you are in expensive market the new rules are beneficial to you.
You now wouldn’t get penalized as much for not having a lifetime’s worth of money for a down payment.
Would you rather pay a $200,000 or a $35,000? That’s 20% down payment vs 3.5% down payment on a million dollar home.
If your pick is 35K like me…
the fee changes mean you won’t be penalized as much for NOT having 200K in the bank ready to buy a house.
The quick and dirty 411
Essentially the rules are meant to even the playing field a bit more.
By reducing the upfront mortgage costs for people with lower credit scores and lower down payments it opens up the doors for more people to buy a house.
Are people that want to pay 20% down getting screwed?
Absolutely yes.
But the fee increase for the top tier borrowers is minor compared to the amount of money saved for the lower tier borrowers. See the example here.
This new mortgage rule is literally the same as income taxes…
You earn more. You pay more taxes. For the good of society.
It’s the same as me paying taxes to my school district when I don’t have children.
It is the same as your tax dollars going towards SNAP even though you may never be on food stamps yourself.
It’s the same as you paying taxes to fix the roads in the part of town that you never drive in.
What do you think? Are the fee changes good or bad?
Comment below and let’s chat about it!
