To the relief of many, the Federal Housing Finance Agency (FHFA) has canceled its plan to change mortgage fees for people with certain debt-to-income ratios.
Some borrowers would have been charged debt-to-income (DTI) ratios above 40%. DTI is the portion of your monthly pretax income that is spent on paying down recurring debts, including mortgages, rent, and credit card balances. Those new fees were supposed to go into effect May 1, with other changes based on credit score and loan size, were delayed until August 1 due to the industry downturn, and have now been canceled as of Wednesday.
“It was clear from the beginning that these upfront fees would hurt the future mortgage borrower,” said Warren Davidson, Ohio congressman and chairman of the Housing and Insurance Subcommittee.
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How will DTI percentage fees hurt borrowers?
Borrowers with a DTI of more than 40% had to pay an additional 0.375% charge on the home loan that Fannie Mae and Freddie Mac would take out.
∙ On a $300,000 loan that would have translated into an upfront fee of $1,125. Or if the borrower can’t pay that and opts for a higher interest rate instead, it will cost $24.75 per month. Over 30 years, that would have meant an additional $8,910.
The DTI ratio by itself is not a strong indicator of a borrower’s ability to repay loans, said Robert Broxmidt, president and CEO of the Mortgage Bankers Association, an industry group.
“There’s also the issue of unfairness,” said Andrew Ryan, director of sales operations for Cornerstone Home Lending in California. “A couple can have a near-perfect credit score, no credit card debt, pay their bills on time but through no fault of their own, the DTI is 41%,” he said, and they have to pay the fee. “The fees make their DTI higher.”
Other agencies such as Veterans Affairs, the USDA, and the Federal Housing Administration allow 50% DTI without adjusting mortgage fees, Ryan said. “So, Freddie and Fannie’s FHFA (loans) is no longer relevant.”
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How Can DTI Rate Fees Hurt Lenders?
Income and expenses can change many times during the loan process,” particularly given evolving assumptions about the nature of debt and income, growth in self-employment, part-time work, and employment in the “gig economy,” Proxmet Books In a letter to FHFA Director Sandra Thompson in February.
These changes can cause DTI ratios to fluctuate, which can mean multiple changes in the pricing of a borrower’s loan. This could mean difficulty complying with rules regarding loan revisions or delays in the closing process.
Lenders have also expressed concern that multiple pricing changes may threaten borrower confidence and lead to “bait and switch” when introducing loan pricing,” Proxmeet said.
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What then?
Now that concerns about DTI percentage fees have subsided, there remains concern about fee changes based on credit scores and down payment sizes that went into effect May 1.
These fee changes resulted in some people with high credit scores paying more than they would have before May 1 — though less than if they had a low credit score. The penalty for having a lower credit score is reduced than it was before May 1st.
“Congress will now take action to end this tax on creditworthy borrowers,” said Rep. Patrick McHenry, R-North Carolina and chairman of the House Financial Services Committee.
While some members of Congress look to repeal these fees, the FHFA says it is now moving into further discussions with industry stakeholders about setting fees and gathering public input. It said it would soon publish details about an upcoming application for inclusion under fee pricing.
Medora Lee is USA TODAY’s money, markets and personal finance correspondent. You can contact her at [email protected] and sign up for the free Daily Money newsletter for personal financial advice and business news every Monday through Friday morning.
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