“Lending” a hand? A look at new mortgage rules

New mortgage lending rules have stirred up a heated debate, with some critics arguing these regulations unfairly target homebuyers with good credit.

According to Fox News, under the new rules which took effect May 1, “borrowers with lower credit ratings and less money for a down payment will qualify for better mortgage rates than they otherwise would have, while those with higher ratings will pay increased fees.”

Critics of the new rules claim they disproportionately affect, for example, Asian homebuyers, who have the highest credit scores of any demographic group, placing unnecessary hurdles in the path of these potential buyers.

According to Fox News: “The 745 average credit score for Asian Americans came in 11 points higher than White Americans, who have an average credit score of 734. Asian American scores also came in ahead of Hispanic and Black Americans, who average ratings of 701 and 677, respectively.”

The CSRA Housing Market

According to recent data, the average home price in Augusta stands between $170,000 and $190,000, with a median household income of around $57,000.

60% of the population in Augusta owns their homes, while the remaining 40% are renters.

“Currently, the housing market is very active for buyers and sellers and continues to maintain its momentum,” said Augusta realtor, Nancy Powell of Powell Properties. “While there was a bit of a slowdown during the holidays, as in a normal market, spring brings an increase in sales and listings. However, due to the increase in interest rates, sellers are having a hard time parting with their homes purchased at much lower rates, unless it is out of necessity and buyers are having to cope with not being able to afford the level of home they were able to a year or so ago.”

Powell said high-interest rates should continue heading to “tolerable” levels.

“While they are not predicting those drastically low rates that I believe we will never see again, their range of the rates that we settle at will be 4.5% to 5.5% range,” she said. “Other parts of the economy like the rate of increase or decrease of inflation, will influence the housing market. Buyers & sellers feel most comfortable when things are stable and the amount of ups and downs with the cost of purchasing a home are limited and predictable.”

Augusta-area mortgage broker, Kerry King of Guild Mortgage agrees about the current state of the housing market.

“It is pretty intense, to say the least,” she said.  “The anxiety is worse than ever, in my opinion.”

Mortgage Rule Impact

King says recent interest rate hikes have reduced the average person’s buying power. However, she says the controversial lending rules have minimally impacted her clients, because they don’t affect those seeking FHA or VA loans, which make up the bulk of her business.

“I am glad that people with slightly lower scores under 700 are not hit as hard, since for some reason, people think conventional loans are better than FHA or VA, which is not the case, unless the home has health or safety issues,” she said.

King emphasized the importance of educating potential homebuyers about homeownership and cautioned against rushing them into unsuitable loans.

Powell has mixed feelings about the mortgage redistribution plan:

“I think the layout of the plan was done in such a way that made it seem that a person with good credit would be paying a higher interest rate than those with lower credit scores. That is not exactly the way it will work, if my understanding is correct,” she said. “For example, if you have a credit score of 740 or higher, on a $500,000 loan, you would pay a fee of 0.25%, which is $1,250. After that date, you could pay as much as 0.375% – or $1,875 – on that same loan. This example shows that the rate or fees charged by the lender will go up with a good credit score, but those with poorer credit will not realize the same additional fee on their mortgage. Does that seem to punish someone that has built up their credit score by making them pay extra fees? Yes, it does. However, most borrowers at this level are going to put down a sizable down payment of 10%-20%, essentially making that extra fee irrelevant.”

Powell said the flip side of the coin is that borrowers with lower credit scores won’t be charged extra fees to borrow money at the market rate.

“Most of your borrowers with lower credit will not or cannot afford to make such a large down payment and will be making payments of 96.5% – 100% of their loan depending on their loan type,” she said.  “Other adjustments that lower credit score/lower down payment buyers will gain an advantage from are the lessened amount of PMI (Primary Mortgage Insurance), which is charged if the borrower can’t pay at least 20% of their loan. This fee is added to the loan and causes the monthly payment to increase by a substantial amount. The idea of lessening this fee will ease the burden for homebuyers who can own a home, but not if extra fees like PMI are included. I think that it is not burdening those with higher credit scores per se, but rather relieving some of the burdens those with poorer credit scores must endure.”

Powell added that because credit scores are commonly thought of as contributing factors to this, people often wonder about fairness.

“Keep in mind that the lower credit scores they are referring to are not “rock-bottom” scores, but rather, scores that are just not quite as high as others,” she said. “For example, a young couple who is still paying on student loans, but has enough to purchase a home, will not have as high a credit score as say a 50-year-old couple with little debt and commonly have assets built up already. So, while I understand the feelings of the unfairness of charging those that have worked hard to have a high credit score, it is not that black and white. I see it as giving a little help to those that are on their way to achieving the level of those that are said to be penalized.”