You may have heard that first time home buyers are getting a break on interest rates! It’s true! To understand how and why, we’ll need to go a little deeper on the topic.
The Federal Housing Finance Agency (FHFA) is the regulator of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that purchase mortgages from lenders. The FHFA sets the loan level pricing adjustments (LLPAs) for loans that are sold to Fannie Mae and Freddie Mac.
The LLPAs are used by Fannie Mae and Freddie Mac to manage the risk of the loans they purchase from lenders and to ensure that they are able to meet their financial obligations. These LLPAs are used by the GSEs to adjust the prices they pay to lenders for mortgages, based on the risk characteristics of the loans.
As you might expect, these LLPAs are typically, in turn, imposed by mortgage lenders. These additional charges are applied to the interest rate of a loan to compensate the lender for the added risk associated with certain loan features, such as a high loan-to-value ratio or a low credit score. This is why we, as mortgage originators, have such hard time answering the question, “What’s your rate?”
Things like a low credit score or a high loan-to-value ratio or the amount of money you want to borrower or whether you are refinancing or purchasing or whether you are buying a condo or a multi-unit property all impact the interest via these LLPAs. These various loan characteristics, in simple terms, are how the banks determine your overall risk profile and that allows them to then quote you an interest rate.
For example, a borrower with a low credit score may be more likely to default on a loan than a borrower with a high credit score. Similarly, a loan with a high loan-to-value ratio (meaning the borrower has a small down payment) may be considered riskier than a loan with a low loan-to-value ratio. Condos are riskier than a single family residence and second homes are riskier than a primary occupancy home. There are other adjusters too!
Having explained all of that, the good news is that the FHFA is removing some of these risk-based price adjustments for first-time home buyers and that means lower interest rates for these very important buyers! There are some rules though and they mostly revolve around income and whether or not you are considered a first-time buyer (spoiler: even if you have purchased a home before, you could still be considered a “first-time buyer”. You just can’t have had a financed property in the last three years).
If you’d like to know more about how these changes impact you or your clients please contact me!