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Upcoming Interest Rate Shift! How To Prepare BEFORE April

Certified Mortgage Advisor
NMLS 1701021
January 31, 2023

Changes coming up

If you're looking at buying a home in the next couple of months and using a conventional loan, interest rates are about to get really weird. So there's gonna be a new change to interest rates coming up on May 1st. So this change is likely going to end up taking effect a couple of months before that, somewhere in the March, or April range.

Impact that buyers don't see

So what's ending up happening here is conventional loans have this thing called Loan Level Price Adjustments. And this is something that you as a home buyer will usually never see or interact with, but this is what impacts your interest rate.

How Adjustment works?

So the numbers that do not reflect the interest rate, they're what's called an Adjustment. Basically for about every 0.5% change in adjustment is about a 0.25% change in interest rate.

So, for conventional loans, the interest rates are based on your down payment and your credit score. Primarily that's what is the risk of the loan. So theoretically, the more money you put down, the higher your credit score you have, and the less risky your loan is.

What's changing coming in May?

You can see in the chart below that this is where rates are gonna start increasing for people. And in the green, this is where they're going to start decreasing. So there's this change that's will make people not super happy. Because what's happening is you can see someone who's putting 20% down, an 80% loan value ratio, with a 720 score is going to have a higher interest rate. That change is now, to be made compared to what the interest rate would have been now.

So in May, interest rates are going to increase than for someone who puts 20% down with a 720 credit. Same thing with a 740 credit score compared to somebody who's putting 5% down and has a 740 credit score. Interest rates are actually going to get lower here in May.

So there are a lot of people who are not very happy with this at all.

Reasons why people are not happy with this changes

In fact, here's a quote. An article where says, some loan officers described it as robbing Peter to pay Paul to lower risk. Borrowers with high credit scores and larger down payments are now going to be penalized and essentially forced to subsidize borrowers who haven't saved money and are actually much higher risk.

How on earth is it fair? A buyer who diligently saves to make homeownership possible will now be forced to compensate for the buyer who blows his paycheck and doesn't save more than the bare minimum necessary.

That's a little bit of a new exaggeration, but I get the point. They're saying buyers should be rewarded for responsible financial behavior, not harmed by him.

And I do wanna address what this change looks like and some solutions to it as well.

Rate Discount Checker

So really quickly, I wanted to show you some of the differences here. I made this really quick chart just to illustrate what these changes actually look like.

As you can see, the old Loan Level Price Adjustments or the ones that are current today and this is what the new one is going to be on May 1st. So what's ending up happening here is you can see in the red. Basically, people who were more, who had higher interest rates were people who had lower credit scores and were putting less money down. And you can see that's actually lightened up a little bit.

Where now Fannie Mae and Freddie Mac on all conventional loans are favoring people who are putting have higher credit scores but primarily have higher down payments in here.

Rate Hacking

So what I'm gonna do is actually help you with a strategy and a future video called Rate Hacking. And in this, what you can do actually is if you were looking at doing 20% down, for instance, okay, maybe you had a 700 credit score.

Instead of being charged the 1.375% and adjustment, we can actually do 3% down. To lower the interest rate, and then you can put the other 17% on the first payment. And I'll help walk you through that strategy in a future video. I just wanna communicate these changes that are happening here.

Loan Level Adjustment Chart

Another change that's being made as well is that if we actually go into the Loan Level Price Adjustment chart, this is the back-end for interest rate pricing.

There are also going to be adjustments added to different scenarios, and again, remember these are adjustments then affect the interest rate by roughly 0.5%. Adjustment changes the interest rate by about 0.25%. So for instance, if you have a debt-to-income ratio above 40%, You're going to see a hit to your interest rate because of that, based on your down payment.

And this is going to affect when you're shopping for a loan because most of the time a lender doesn't know what your debt-to-income ratio is when they quote you a rate because it didn't matter before. Now, once this change goes into effect, it's very likely that you'll have to submit a full application to a lender to be able to get an actually accurate quote from a lender.

Here's a loan officer who said it'll be nearly impossible to quote an accurate rate unless your borrower has completed a full application and their numbers have been run on a specific property. He said, this will also make it difficult for consumers to shop for a rate as the rates they see online will typically be for borrowers that fit the cookie-cutter financing box, which many borrowers rarely meet.

Quick recap

These are the adjustments here that do impact your interest rate. And so it is just important to be mindful of some of these changes that are gonna come. Again, the change is technically happening at the beginning of May, but it's likely we'll see lenders starting to implement these closer to around March or April.

Added a 70% down category

So a couple of changes here as well as there's a 70% down category that was added which is very interesting.

Two new credit score brackets

Also, two new credit score brackets have been added. It used to be that the top of the chart on loan level price adjustments was 740. This used to be the top of the chart. If we go back to the previous chart 740 was at the top. Now, what got added is there's now a 760 bracket and a 780 bracket.

So basically 780 is at the top of the chart. If you have an 800 score, you're not going to get a better interest rate. But by looking through this chart, you'll be able to start to see, okay, maybe if I have a 780 credit score, I can actually find the down payment that has the lowest Loan Level Price Adjustment and see if that's a better down payment strategy.

And then I can put the remainder of my down payment on the first payment to lock in that lower interest rate, but still, put the same amount of money effectively down.

Removed 20% down down trick

Also, they removed the 20% down trick. There used to be this trick where you could put 19.9% down, and get a lower interest rate than 20% down.

So you'd do 19.9% down and put the remainder 0.1% down on the first payment to get you to 20% to remove the PMI, but you are still locked in a lower interest rate that doesn't exist anymore, unfortunately.

Fees are lower

Overall though, fees are lower from a 3.5% adjustment peak down to a 2.875% adjustment peak.

DTI adjustment

Also there is debt-to-income adjustment in there as well. So mortgage shopping is going to get strange. I think there's gonna be a lot of misleading interest rates online because people are going to just immediately show you a rate that doesn't have a debt-to-income ratio adjustment on it. And it's going to look like to get the best, most accurate rate you're going to have to apply with a lender to actually make sure you're getting a correct rate.

Adjustments, Adjustments, Adjustments

Not to mention, there are also adjustments on if you're getting an adjustable-rate mortgage, you're gonna have a higher interest. If you're putting let's see, less than 15% down. So anywhere, 90 to 95 LTV, which is gonna be five to 10% down. If you're looking at a condo, you're gonna have a higher interest rate. If you're looking at an investment property second home, these changes were already in place. But quite a significantly higher interest rate.

If you're an investment or second home. A manufactured home, it's gonna be slightly higher, two to four-unit homes, slightly higher. And then a high balance fixed-rate and ARMS higher as well. So things are going to get a little strange.

LLPA Waiver

Now, one thing you have to keep in mind here is that there's a waiver to make all this go away. There is one thing that you can qualify for that waves every single one of these waivers and will give you a lower interest rate. And it's right here. It's called a Loan Level Price Adjustment waiver.

Again, only for conventional loans. There are two ways that you can qualify for this waiver. And if you qualify for this waiver, you will not have to worry about any of these adjustments about DTI, about second homes. And you won't have to worry about any of the Loan Level Price Adjustments based on, credit score and down payment.

How to qualify?

So the way that you qualify for those is either with a HomeReady or Home Possible loan through Freddie Mac. And the way to do that is to be under 80% of the area median income, or if you're a first-time home buyer with a qualifying income at a hundred percent of the area median income or lower or 120% in high-cost areas.

Fannie Mae HomeReady Lookup

So what we can do is go to Fannie Mae HomeReady lookup and it's gonna give us a map. We want the Area Median Lookup tool. And what you can do is just go to, let's say we wanna look, I don't know, randomly in Georgia, I can see 80% of the Area Median Income would qualify for HomeReady. So if you're under, or if you're at $51,000 annual income or lower than you'd qualify for a HomeReady.

If that's not the case, then if you're under 64,100, and your first-time home buyer, then you would qualify if this was a high-cost-of-living area. Let's say we're looking at closer to somewhere like Nashville where it says high-cost area than 120%. This would allow you to qualify for those Loan Level Price Adjustment Waivers.

I know this can be confusing and complex. Ultimately this is stuff that you're not really going to see. This all happens on the back end, but I just wanna share this with you so you're aware of it.

Rate Hacking

And I'm gonna be introducing again, a new strategy that I'm just gonna call Rate Hacking, where we can basically take a look through these charts and figure out how can we get you the best possible rate through these charts. So let's just use the information to your advantage and then show you how you can apply the rest of that money to your first payment.

That way you can take advantage of the rate savings and use this the best to your advantage that you possibly can instead of just going with whatever rate you saw in the first place.

My team and I would love to help you

We're licensed in all 50 states. You can go to Win The House You Love we do free home loan consults upfront that way we can answer any questions that you have, walk through your scenario, and then take you through a pre-approval so you can see all your decision-making numbers upfront. Again, it's at WintheHouseYouLove.com and we'd love to help.

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Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Allied First Bank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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