By Don DeBat

6-Mar-23 – That 1996 immortal quote came from a South Carolina real estate developer and entrepreneur, the late Herbert L. Benson, Jr. It headed the chapter titled “Banks Are Not Your Friend” in “Escaping Condo Jail,” a book co-authored by Chicago Realtor Sara E. Benson (Herbert’s daughter) and this writer in 2014.

“Beware! They still use their same old rules,” Benson (left) continued. “You can always borrow money if you can prove to them that you don’t need it. Deposit $10,000 and they will be glad to lend you $5,000. Shop around, read the small print, and then decide what is best for you.”

In the ever-changing world of “Mortgageland,” befuddled borrowers are often easy prey for the money lenders. Now, home loan experts warn that “big changes to mortgage costs” are coming, starting on May 1, 2023.

Freddie Mac and Fannie Mae, the agencies that buy the vast majority of new conforming mortgages for the purchase of homes in the secondary market, soon will impose new Loan Level Price Adjustments, or LLPAs.

LLPAs are based on loan features such as the borrower’s credit score, the loan-to-value ratio, property occupancy (owner-occupied versus non-owner-occupied homes), and most recently, your debt-to-income ratio. Many lenders will begin to implement the changes on loan applications made in March and April, experts say.

In a nutshell, here’s what will change for better and for worse. On the positive side, the effective penalty for having a credit score under 680 will be smaller than it was, but it still will cost a borrower more to have a lower score. For example, if you have a FICO score of 659 and are borrowing 75 percent of the home’s value, you would be required to pay a fee equal to 1.5 percent of the loan balance at closing. If you have a credit score of 780-plus you would not pay this fee.

Before these changes, a borrower with a credit score of 659 would have paid a whopping fee of 2.75 percent of the loan amount. On a hypothetical $300,000 loan, that’s a difference of $3,750 in closing costs.

Elsewhere in mortgage-hunting land, things will get worse. Borrowers with higher credit scores generally will pay a bit more than they were paying under the previous structure. These added fees don’t necessarily have to come out of the borrower’s pocket upfront. In some cases, lenders will charge higher interest rates and roll the costs into the loan amount for the borrower. However, the costs are still there, and technically will be paid by the borrower over time in the form of higher interest rates.

The most notable new charge is for debt-to-income ratio, or DTI. Every loan guaranteed by the agencies has a DTI attached to it. If the borrower’s DTI is more than 40 percent and he or she is borrowing more than 60 percent of the home’s value, the more the loan will cost.

The good news? Federal Housing Administration (FHA) insured loans, Veterans Administration (VA) guaranteed mortgages, and non-conforming jumbo loans from a retail bank or credit union will not be affected by these new fees.

Avoid large credit card purchases while waiting for mortgage approval

Jeremy Rose, Senior Vice President of Mortgage Lending at A and N Mortgage Services in Chicago, gives the following tips on controlling debt to keep your credit score high before you take out a mortgage:

• Use credit cards cautiously. Credit cards can be a great resource but using them as a loan can be tricky. They often have very high interest rates, and the interest can quickly become more than the amount borrowed in the first place.

• Never make a large credit card purchase while waiting for approval of a mortgage. Always pay off your credit cards as soon as possible, prioritizing those with high interest rates.

• A budget is a good idea. Figure out how much you earn, how much you owe, and how quickly you want to pay off the debt. Then, make a budget and stick to it.

• Avoid “interest-free” loans. They may initially seem like a good deal, but rates typically skyrocket after a certain period. Always thoroughly read the terms and conditions before signing any loan agreement.

Home loan rates on rise again

On February 16, benchmark 30-year fixed-rate mortgages rose for the second consecutive week to 6.32 percent from 6.12 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey.

A year ago, the 30-year rate was 3.92 percent. Fifteen-year fixed loans averaged 5.51 percent, up from 5.25 percent a week earlier. A year ago, 15-year loans averaged 3.1 percent.