As prospective buyers navigate their way through homeownership affordability in a post-pandemic world, home lenders nationwide are preparing for sweeping changes to mortgage rates behind the scenes. While lenders already tie their rates and fees to purpose, credit score, loan-to-value, and property type, there are now new factors to consider. Income, debt ratio, and homeownership history will also impact what borrowers pay to obtain a home loan. In other words, accurately quoting mortgage rates is now becoming more specialized for loan officers than ever before.
In January of 2023, the FHFA announced a series of changes that will impact any lender who writes conforming loans backed by government sponsored enterprises (GSE), such as FannieMae and FreddieMac. (For reference, over 50% of home loans written in America in 2022 were GSE funded loans.) The changes are scheduled to go into effect as of May 1, 2023. Most lenders in the US have already begun quoting the new pricing structure, in anticipation of future closings. If they’re not yet, borrower timelines should be considered to avoid an unwelcome surprise. Some of these changes will affect buying power.
A notable shift to anticipate is revised minimum credit score tiers. While a 740 FICO score used to be rewarded, 780 is the new benchmark for obtaining the best terms, unless there is sizeable equity.
Expect to see higher rates for “cash-out” refinances and for financing non-primary residences. For our Wisconsin snow birds and multi-family investors, cash may not flow as easily.
The most controversial change is pertaining to DTI. If housing and consumer expenses exceed 40% of gross income, more than only approval odds will be impacted. It will also likely mean a higher interest rate, too. Since it is difficult to determine this ratio calculation early in the application process, it is important to work with an experienced loan officer. For buyers, obtaining a fully underwritten preapproval up front is highly advised.
If just one of the borrowers is a first-time buyer or if they are of low to moderate income the new rate adjustments DO NOT APPLY. This benefit applies to primary residence purchases for all buyers who earn less than 80% of the median income for the county, and first-time buyers who earn less than 100% of the median income for the county.
With all these changes, working closely with partners you trust is key, including open communication between realtor, client, and lender. As Park Bank continues to grow as a mid-sized, locally owned, and well capitalized community bank, we’d love to work with you. Knowing your banker makes all the difference in an ever-changing financial world. Watch for our newest location in Cross Plains opening this fall!