To the relief of many, the Federal Housing Finance Agency (FHFA) has canceled its plan to change a mortgage fee for people with certain debt-to-income ratios.
The fee would have been levied on certain borrowers with debt-to-income (DTI) ratios above 40%. DTI is the portion of your pre-tax monthly income spent on paying recurring debts, including mortgages, rent and credit card balances. This new fee was supposed to go into effect on May 1, with other changes based on credit score and loan size, delayed until Aug. 1 due to industry pushback, and now scrapped as of Wednesday.
“It was clear from the outset that this upfront fee would hurt future mortgage borrowers,” said Warren Davidson, Ohio congressman and chairman of the Subcommittee on Housing and Insurance.
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How would the DTI ratio fee have hurt borrowers?
Borrowers with a DTI ratio above 40% would have had to pay an additional 0.375% fee on their home loan that Fannie Mae and Freddie Mac would acquire.
- On a $300,000 loan that would have translated into a $1,125 upfront fee. Or if a borrower couldn’t pay that it and chose a higher interest rate instead, it would cost another $24.75 a month. Over 30 years that would mean an additional $8,910.
On its own, a DTI ratio also isn’t a strong indicator of a borrower’s ability to repay loans, said Robert Broeksmit, president and chief executive of the Mortgage Bankers Association, an industry group.
“There’s also the unfairness issue,” said Andrew Ryan, sales operation manager at Cornerstone Home Lending in California. “A couple could have a near perfect credit score, with no credit card debt, pay their bills on time but through no fault of their own have a DTI ratio of 41%," and have to pay the fee, he said. He said the "fee makes their DTI ratio even higher.”
Other agencies like Veterans Affairs, U.S. Department of Agriculture and Federal Housing Administration loans allow a 50% DTI ratio without a mortgage fee adjustment, Ryan said. “So, the FHFA for Freddie and Fannie (loans) are out of step.”
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How would the DTI ratio fee have hurt lenders?
Income and expenses can change several times throughout the loan process, “especially considering evolving assumptions concerning the nature of debt and income, and the growth in self-employment, part-time employment, and “gig economy” employment,” wrote Robert Broeksmit, president and chief executive of industry group Mortgage Bankers Association, in a letter to FHFA director Sandra Thompson in February.
These changes can cause DTI ratios to fluctuate, which could mean multiple changes to a borrower’s loan pricing. And that could mean difficulty complying with rules about loan revisions or delay the closing process.
Lenders also were “concerned multiple pricing changes could jeopardize borrower trust and lead to the appearance of a “bait and switch” when offering loan pricing,” Broeksmit said.
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What’s next?
Now that fears over the DTI ratio fee have subsided, there’s still concern over fee changes based on credit scores and down payment sizes that went into effect May 1.
Those fee changes resulted in some people with high credit scores paying more than they would have prior to May 1 -- although less than if they had a low credit score. The penalty for having a lower credit score shrunk from what it was before May 1.
“Congress will now take action to end this tax on creditworthy borrowers,” said Patrick McHenry, congressman from North Carolina and chairman of the House Financial Services Committee.
While some members of Congress look to dismantle those fees, the FHFA says it's now moving on to more discussions with industry stakeholders about setting fees and collecting public input. It said it would soon release details about an upcoming request for input on a fee pricing framework.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
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