There’s been a lot of buzz lately about the new easing of credit score requirements and how that affects mortgage rates, down payments and home ownership.
We sat down with Loan Consultant David Rodriguez from LoanDepot to break it down for you and separate the gossip from the facts.
Ultimately, answering the big question:
If I have a lower credit score, will I get a better rate than those with good credit?
If you’ve worked hard to maintain good credit and keep your debt-to-income (DTI) ratio low, this new policy is not being set in place to penalize you for your success.
One of the most common questions asked in regard to this new policy is whether someone with a lower credit score will get a better rate than those with good credit.
The short answer is no, but let’s explain why…
First, any mortgage under $726,200 is considered a conforming loan, which means it is sold to the government-subsidized entities Freddie Mac and Fannie Mae (also called the Agencies). Freddie and Fannie’s guidelines set the industry standards for the banks, and these guidelines and pricing incentives have changed over the years.
Today, Freddie and Fannie, along with many depository banks, are pushing for first-time home buyers to attain homeownership. They are especially focused on helping those in low-to-moderate income areas per the U.S. Census get into the market with low down payment options. There are very limited areas in and around New York City that fall into this category. However, it’s important to note that these new options are mainly for conforming loans sold to Freddie and Fannie.
Even with those new pricing incentives put into place, a lower credit score will not get you a better rate than those with good credit. The agencies are redistributing the pricing incentives for those with lower credit scores to not be hit as hard as before on the loan level pricing adjusters (LLPAs) – aka the reduction in hits charged to people with lower credit scores. The LLPAs adjust for everything, including down payment, credit score, property type (condo vs. single-family home), occupancy (primary, second, investment), etc. For people with lower credit scores, they will see better pricing specifically in the range when putting less than 20% down, a sector where they would be penalized heavily for having lower credit scores.
The important thing to consider here is that those with good credit, good income and low debt have options that those in opposite scenarios do not. In New York City, we are lucky to have so many options at our fingertips – many other areas of the United States are not so lucky, which is why these government-subsidized entities are putting new pricing incentives into place to help that part of the population. In New York, we have a plethora of options at our fingertips to shop around for the best rate.
Another important fact to consider is that loans over $760,000 – also known as jumbo or portfolio loans – are kept on a bank’s books and not sold to Freddie or Fannie. These loans have different guidelines and rates than conforming loans and can be much more favorable for buyers with good credit, good income, larger down payments, and low debt. You will see many clients in our area fund their loan through portfolio loans which give big rate incentives for grade-a clients.
In April 2023, the median sale price in Manhattan was $1.18M, according to UrbanDigs, so many New Yorkers will be purchasing properties way above what Frannie and Freddie control, and will therefore need to follow the guidelines of the lending institution of their choice versus the government-subsidized entities like Freddie Mac and Fannie Mae.
So, while it may seem confusing, the biggest takeaway here should be that in New York City, partnering with a loan officer who has multiple product options available is your best bet to get the most favorable options, and the lowest rate. Those lenders can help guide you through the process of securing financing and walk you through the different financing product options available that fit your needs – and can help you capitalize on the lowest rates possible.
If you have questions about your home-buying journey, or your financing options, reach out to us today to be connected with an agent and a loan officer to help make your real estate goals a reality.
In summary, Freddie and Fannie, along with many lenders, are focused on helping first-time home buyers attain homeownership, especially those in low-to-moderate income areas and first-time homebuyers. Lower credit scores won’t get you a better rate than those with good credit, but there are options available to help those with lower credit scores.