Fannie Mae Fees can increase your interest rate

by Tom Tousignant

in Blog, Home Buying, Mortgages, Refinancing

In years past, it was pretty easy to grab the phone and call 3-4 mortgage lenders adn ask, “What are your rates?”  Lately, this has become a lot more difficult. In fact, if the person on the phone gives you an interest rate in response to that question, you can be sure of only one thing – the person on the phone doesn’t know what he/she is talking about.

  Recently, Fannie Mae and Freddie Mac (the largest buyers of 30 year fixed, conforming mortgages), started charging what they call ‘Risk Based Pricing’.  Before this was announced, a 30 year fixed loan was basically the same price for any borrower with a credit score of 660 or higher and a loan amount up to 95% of the home value. But now, Fannie and Freddie require pricing “add-ons” using a matrix of credit score and loan to value percentages.

This can effect you in several ways – the biggest is if you have a credit score less than 740 and a loan amount greater than 60% of the value of your home.  As an example, someone with a credit score of 739 versus a 740 will be charged 0.25% of the loan amount extra by Fannie Mae on the purchase of a home with 20% down.  On a cash out refinance, however, a 739 credit score drives the rate of the loan 0.375% higher than the purchase loan!  If a cash out refinance has a 740 credit score, the rate is 0.125% higher than the purchase loan, but 0.25% lower than if they only had a 739 credit score.  As you can see, every one’s scenario will be different and you can’t just ask, ‘What are your rate’s?’ anymore.

To cover these increased costs, your should get two options – increase the interest rate to allow the lender to pay the FNMA fees for you, or pay more closing costs.  Unfortunately, for some, these pricing adjustments may prevent some people from buying or refinancing their house.  A good mortgage planner will be able to tell you the exact amount of the FNMA fees you are being hit with, and look for ways you can minimize these costs that are being applied to all lenders that use FNMA guidelines for their lending.

There are simply so many unknowns with the combination of credit score, loan to value percentages, property type, loan purpose, etc… that any reputable lender should be upfront, and be clear that any quote given is based on an assumption of certain parameters.  They will need to ask you some questions before they could honestly ask that question.

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