Why having good credit could cost you more on a home mortgage

WASHINGTON -- If you're looking to buy a home, new federal rules may impact how much you pay for a mortgage.

Beginning May 1, upfront fees for loans backed by Fannie Mae and Freddie Mac will be adjusted because of changes in the Loan Level Price Adjustments (LLPAs). Those fees are based on things including the borrower's credit score, size of the down payment, type of home and more. In some cases, people with better credit scores may pay more in fees, while those with lower credit scores will pay less.

Here's what to know about the new federal rules:

Why is this happening?

The rule changes are part of the Federal Housing Finance Agency's (FHFA) efforts to provide "equitable and sustainable access to homeownership" and to strengthen capital at Freddie Mac and Fannie Mae.

"The [Biden] administration's stated purpose behind making these changes is to help make it easier for borrowers who have historically been disadvantaged and have had a hard time accessing credit," Realtor.com chief economist Danielle Hale told ABC News.

Who does it impact?

The new rules only apply to loans backed by Fannie Mae and Freddie Mac, and impact any new or refinanced home loan signed May 1 or later. According to Urban Institute, Fannie Mae's and Freddie Mac's share of the mortgage market collectively comprised nearly 60% of all new mortgages during the pandemic in 2020. That's compared with 42% in 2019.

Homebuyers who put down a larger payment of 15% to 20% could see a bigger increase in mortgage fees, but Bankrate.com mortgage analyst Jeff Ostrowski said that shouldn't change a borrower's thought process.

"The new matrix everyone is trying to decipher is only part of the equation," Ostrowski told ABC News. "The other part is mortgage insurance: Borrowers who put less than 20% down have to pay mortgage insurance that more than offsets the lower upfront fee. So there's no financial advantage to the borrower to put down less than 20%."

How will it work?

"The new fees are slightly more expensive for some borrowers with good credit, and slightly less expensive for some borrowers with less-than-perfect credit," Ostrowski told ABC News. If you have a stellar credit score, you'll still pay less than if you have a weak one, but the penalty for having a lower credit score will now be smaller than it was on May 1.

"Because of these changes, the advantage of having a higher credit score, or making a larger down payment, is not as big as it used to be," Hale said.

For example, beginning May 1, a buyer with a good credit score of 750 who puts down 25% on a $400,000 home would now pay 0.375% in fees on a 30-year loan, or $1,125, compared to 0.250%, or $750, under the previous fee rules.

Meanwhile, a buyer with a credit score of 650 putting a 25% down payment on a $400,000 home would now pay 1.5% in fees on a 30-year loan, or $4,500. That compares with 2.75%, or $8,250, under the previous rules.

According to the FHFA, the new rules will redistribute funds to reduce the interest rate paid by less qualified buyers.

Is this a good thing?

It depends on who you ask. Critics say the new rules penalize people with good credit, using them to subsidize loans of riskier borrowers. "It's another subsidy to try to buy votes," former Home Depot CEO Bob Nardelli told ABC News.

The new mortgage fee rules do nothing to address ongoing inventory challenges in the housing market, which is putting upward pressure on home prices. The median U.S. home price in March was $400,528, according to the realty broker Redfin.

Some housing experts fear the new rules will encourage banks to lend to borrowers who perhaps shouldn't qualify for a mortgage in the first place. Lending to unqualified buyers is what led to the financial crisis of 2008; banks gave too many unqualified buyers home loans that they ultimately couldn't pay back.

"This confusing approach won't work and, more importantly, couldn't come at a worse time for an industry struggling to get back on its feet after these past 12 months," David Stevens, a former commissioner of the Federal Housing Administration during the Obama administration, wrote in a social media post. "To do this at the onset of the spring market is almost offensive to the market, consumers and lenders.

Even with the changes, Ostrowski said that overall, mortgage fees continue to favor borrowers with good credit. "You still get a much better deal with a strong credit score," he said. "The fee reductions don't apply to borrowers with credit scores of less than 680 -- so tanking your credit score in hopes of scoring a better deal would backfire."