Higher credit scores traditionally secured lower mortgage rates and fees. However, recent changes have reshuffled this long-standing formula. Historically, a score of 720 guaranteed you some of the best rates, but since 2012, the bar has risen, with scores of 800 or above now needed to secure the best deals. This prompted me to improve my credit score, which paid off when I purchased a new property in 2014 and refinanced it in 2018 at even lower rates.
But imagine if this were flipped—if higher credit scores meant higher fees? This shift could discourage responsible borrowing and increase the risk of another housing crisis. The Federal Housing Finance Agency has recently revised its fee structure, which now increases fees for those with higher scores. For instance, previously, a $500,000 loan for someone with a score of 740 would attract a fee of $1,250. Now, the same loan costs $1,875. This change represents a significant increase and could mean paying thousands more over the life of the mortgage.
If not higher upfront fees, those with higher scores might see these costs rolled into increased mortgage rates. For example, a person with a 740 credit score could end up paying a rate 0.25% higher than someone with a score of 660. In the competitive world of mortgage shopping, even a 0.25% rate difference is substantial and can significantly affect the overall interest paid.
Conversely, those with lower scores are seeing some relief. Starting in May 2023, someone with a score between 640 to 659 will now pay a reduced fee, lowering their costs considerably on high-value loans. This policy aims to make homeownership more accessible to those with less-than-perfect credit histories by decreasing their financial burden, albeit shifting part of it to those with higher credit scores.
This recalibration of fees and rates could reshape the mortgage market, potentially increasing homeownership among lower-credit buyers while adding extra costs for those with higher scores. Whether this leads to a healthier housing market or unintended consequences remains to be seen.
