New Mortgage to Get Pricier Next Year

Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae and Freddie Mac play in the market.

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The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates.

Fannie and Freddie, which currently back about two-thirds of new mortgages, don’t directly make mortgages but instead buy them from lenders. The changes are aimed at leveling the playing field between the government-owned companies and private providers of capital, who are mostly out of the mortgage market now. Fannie and Freddie were bailed out by the government during the financial crisis but are now highly profitable.

The Federal Housing Finance Agency last week signaled the fee increases but didn’t provide details. The agency’s move came one day before the Senate voted to confirm Rep. Mel Watt (D., N.C.) as its director. It isn’t clear whether Mr. Watt, who hasn’t yet been sworn in, weighed in on the changes. An FHFA spokeswoman declined to comment on any discussions with Mr. Watt, who also declined to comment.

Mr. Watt will face heavy pressure by consumer groups and the real-estate industry to reverse course, industry officials said Tuesday. “There will be significant opposition very quickly once people understand what is actually being implemented,” said Martin Eakes, chief executive of the Center for Responsible Lending in Durham, N.C., a consumer-advocacy nonprofit.

The changes take effect in March but will be phased in by lenders earlier. The fee increases come as the Federal Reserve contemplates an end to its bond-buying program, which has kept mortgages rates low, and as new mortgage-lending regulations take effect next month.

“The timing of it is impeccably bad,” said Lewis Ranieri, co-inventor of the mortgage-backed security. “The question becomes: how much can housing take?”

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to a top of 850.)

A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.

Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%.

Executives at Fannie and Freddie said last month that the fees they have been charging are enough to cover expected losses, but that those fees might need to rise in order to allow private investors, which target a higher rate of return, to compete. An FHFA official Tuesday said that even with the latest changes, Fannie’s and Freddie’s fees would be considered low relative to private firms’.

Mr. Ranieri, who runs a mortgage-investment firm, predicted that the move would backfire and hit the economy. Because the private sector isn’t strong enough to lend more, “all this will do is tighten credit. You’re just making housing less affordable,” he said.

Industry executives also said the magnitude of the increases was a surprise. “It’s like Beyoncé’s album: It all of a sudden hit the market,” said David Stevens, chief executive of the Mortgage Bankers Association.

In recent months, some large banks have been offering “jumbo” mortgages, which are too large for government backing, at rates below the conforming mortgages that are eligible for purchase by Fannie and Freddie for borrowers with the best credit. The higher fees could make conforming mortgages even more expensive than jumbos.

The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.

Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won’t take effect before October 2014, the agency said.

10 Tips for Mortgage Borrowers in 2014

The clock is ticking for buyers and homeowners who want to grab a low mortgage rate in 2014. But if you stay on top of your game, keep your finances in order and act quickly, you can still grab attractive mortgage deals.

These 10 mortgage tips can help you with your mortgage decisions in 2014.

1. Document your finances.

Lenders will be extra diligent when underwriting home loans in 2014, as new mortgage regulations go into effect in January. The rules put pressure on lenders to verify that borrowers have the ability to repay their loans.

Keep good records of your finances, including bank statements, tax returns, W-2s, investment accounts and any other assets you own. Be ready to explain any unusual deposits to your accounts. Yes, the $500 that Grandma deposited in your account for Christmas could delay your loan closing if you can’t prove where the money came from.

2. Lock a rate as soon as you can.

Rates will likely climb in 2014 as the Federal Reserve is expected to reduce the pace of the economic stimulus program that has long helped keep rates low. If you are planning to get a mortgage, lock in a rate as soon as you are comfortable with the numbers.

3. Refinance now — if you still can.

Many homeowners lost the opportunity to refinance at a lower rate when rates jumped in 2013. But those who are still paying more than 5 percent interest on their home loans might still have an opportunity.

If you think you may be able to save with a refinance, but you are not sure, it doesn’t hurt to try. Speak to a loan officer and take a look at the numbers to see if refinancing still makes financial sense for you after you consider how long it will take to break even with the closing costs.

4. Buyers, use your bargaining power.

As mortgage rates climbed, lenders lost a big chunk of their refinance business. In 2014, they will turn their attention to homebuyers and will fiercely compete for their business. Buyers should take advantage of bargaining power they gain with that increased competition. Shop around for the best deal and look beyond the interest rate on the loan.

5. Learn your rights as a borrower.

Mortgage borrowers will get many new rights as consumers this year when new mortgage rules created by the Consumer Financial Protection Bureau go into effect in 2014. If you run into issues with your mortgage servicer in 2014 or fall behind on your payments, make sure you are aware of your rights and put them to use.

6. Take good care of your credit.

It’s nearly impossible to get a mortgage without decent credit these days. That will continue to be the case in 2014. If you are planning to get a mortgage, monitor your credit history and score until your loan closes. The best mortgage rates usually go to borrowers with credit scores of 720 or higher. You may still get a mortgage with a score of 680, but lower scores will mean higher rates or higher closing costs.

7. Don’t overspend.

Lenders don’t want to give out loans to borrowers who will have little money left each month after they pay their mortgages and other debt obligations such as credit cards and student loans. If that becomes the case, the lender will tell you that your DTI, or debt-to-income ratio, is too high and you don’t qualify for a loan. Try to keep your monthly debt obligations, including your mortgage and property taxes, below 43 percent of your income.

8. Consider alternative mortgage options such as ARMs.

Mortgage rates are rising, but there are alternatives to grab a lower rate, depending on your plans.

A homeowner planning to keep a house for seven to 10 years could take advantage of lower mortgage rates by choosing a seven- or 10-year ARM instead of the 30-year traditional fixed-rate mortgage. Rates on adjustable-rate mortgages can be as much as one percentage point lower than on fixed-rate loans.

If you are not sure for how long you plan to keep the house, a fixed-rate loan is probably the better choice.

9. Considering an FHA loan? Reconsider.

FHA loans have long been popular among first-time homebuyers because they require low down payments and have somewhat less strict underwriting standards than conventional loans. But they come at a price. Mortgage insurance premiums on FHA loans are likely to continue to rise in 2014, and after recent changes, the borrower is now required to pay for mortgage insurance for the life of the loan. Try to qualify for a conventional loan before you apply for an FHA mortgage.

10. Don’t panic.

Yes, mortgage rates will likely climb in 2014. But don’t panic, thinking you have to buy a home now to grab a low rate. If you are shopping for a home, do your best to move quickly, but remember that this is one of the biggest financial decisions of your life. Get your mortgage and buy your home when you feel ready

Getting a mortgage can mean keeping track of a lot of moving parts. Savvy shoppers know to ask lenders about interest rates, closing costs and how much they can borrow. 

But even seasoned buyers may not know to dig a little deeper. Here’s a look at five key things homebuyers often forget to ask mortgage lenders: 

What’s the Annual Percentage Rate? Interest rates get advertising attention, but you need to pay equally close attention to the annual percentage rate (APR).The interest rate, or note rate, is stated on the mortgage note and is used to calculate your monthly payments. But it may not reflect the overall cost of borrowing. 

Let’s say Lender X offers you a 30-year fixed rate mortgage at 4.5% interest. Lender Y offers the same mortgage for 4.25%. This would seem to be a no-brainer. But we’re missing some key information, namely all the other costs associated with the loan, from closing costs and origination fees to mortgage insurance and more. Lender Y may have the lower rate, but this loan could cost you more in the long run if their costs and fees are higher. 

That’s why you need to look at the APR, which factors in those costs beyond just your interest rate. It’s also why lenders are now required to disclose APR. Otherwise, they could hide fees and charges behind an incredibly low — yet ultimately misleading — interest rate. 

Do I Have to Escrow Taxes and Insurance? Homeowners paid on average about $800 per year for homeowners insurance in 2008, the most recent year for which data is available, according to the Census Bureau. The average property tax bill that year was $1,200. A lender may require you to escrow funds to cover those bills. Instead of writing a $1,200 check at year’s end to pay those taxes, a lender will have you split that total into 12 equal payments. 

Your mortgage payment would include that month’s portion of your property tax and homeowners insurance bills. The money sits in an escrow account until your lender pays the bills on your behalf. Some homeowners would prefer to pay those bills all at once rather than part with a portion each month. Whether you have to escrow funds can depend on where you live, your loan-to-value ratio and other factors. 

Is There a Prepayment Penalty? These have gone out of vogue in the mortgage industry. But you really don’t want to be the exception. Ask lenders if there’s any financial penalty for paying off the mortgage early. A clause like this could potentially impact your ability to refinance or even sell the home. The good news is government-backed loans like FHA and VA loans don’t allow prepayment penalties as a rule. Fannie Mae doesn’t purchase mortgages with prepayment penalties, and Freddie Mac will follow suit beginning next month. 

Is There Anything I Shouldn’t Do Before My Loan Closes? Don’t confuse loan preapproval with loan approval. Lenders will double-check financial information, employment status, credit scores and other important metrics before giving your loan a green light. Don’t change jobs if you can help it. Don’t move lots of money around, or suddenly make big deposits. Save your furniture-buying spree for after your loan closes. Any changes to your credit or your overall financial stability can spell major trouble for your credit file. If you absolutely have to make a major change, be sure to update your loan officer as soon as possible. 

Who Will Service My Loan? It’s kind of jarring for some first-time homebuyers, but you may not send your mortgage payment to the lender that originated your loan. Many lenders sell their loans and the right to service them. Companies are legally required to notify you regarding these kinds of changes. The mortgage servicer will receive your monthly payment and manage your escrow account for taxes and insurance. This is also the entity you’ll turn to if you run into problems paying your mortgage on time. This isn’t uncommon or a harbinger of trouble. Loans and servicing rights get sold all the time. But it’s important to know who will be responsible for processing your payments and ensuring your bills get paid on time.