Breaking down the myths of the latest interest rate legislation
GUEST ARTICLE BY CLINT BENDER OF FAIRWAY INDEPENDENT MORTGAGE CORPORATION
“I just heard interest rates are going up for people who have good credit and rates will be better for people who have bad credit”
What does all this mean? Is it Fake news? Is it true? Is it fear mongering by the media?
Quick answer is “All the above.”
What all this boils down to is that there has been a shift that was in place as of May 1, 2023. This has been in the works since the first quarter of 2023.
To figure out what this entails, lets first look at some of the misconceptions:
1. Rates will go up for people with good credit and rates will go down for people that have lower scores
2. It affects anyone wanting a mortgage after May 1, 2023
3. It’s going to stimulate housing because lower credit score buyers are having trouble getting approved for mortgages
Now, lets look at the truths:
1. This change does not affect FHA, USDA, or VA loans. It only affects conventional loans thru Fannie Mae & Freddie Mac.
2. It COULD potentially cost more for a higher credit score borrower vs a lower score buyer
3. The lack of inventory (homes on the market) and a jump in interest rates are the primary reasons it was slower last year into this year, not because people couldn’t qualify.
Basically, the spread of interest rates between some high credit score borrower’s vs lower credit score borrowers could shrink. Easiest way to explain what is going on is to give a hypothetical example just for comparison: (This is not an advertisement but only a simple example):
Before May 1
Buyer A: 620 credit score. Interest rate offered 7.75%
Buyer B: 800 credit score. Interest rate offered 6.5%
Buyer A: 620 credit score. Interest rate offered 7.125%
Buyer B: 800 credit score. Interest rate offered 6.625%
So, the higher credit score borrower still is offered the lower rate in both examples. What changed is that the interest rate spread between the rate offered between the higher score borrowers and lower score borrowers is much less than before.
All this depends on what your score is and how much $ you are putting towards down payment. Each 20 points in credit score (increase or decrease) and 5% increments in down payment (increase or decrease) will change the factor on if there were any changes to you after May 1. In some instances, there is no movement in rates for the higher score buyer.
Could you say that its rewarding lower credit score borrowers? Possibly, but that is for you to decide. For buyers, the best thing to do when applying for a mortgage loan, make sure that you get ALL options available to you by a licensed loan officer so you can truly compare “apples to apples” to determine the best option for you and your family.