New Mortgage Rule Changes Favor Low Credit Scores And Low Down Payments
A new FHFA mortgage rule that goes into effect on May 1st aims to penalize those with higher credit scores and down payments, in favor of subsidizing higher risk borrowers. What does it mean for the real estate and mortgage market? What is the impact for investors?
New Mortgage Rules Going Into Effect
The new rule being instituted on May 1st switches around the long term trend of lower interest rates going to the most credit worthy and low risk borrowers.
There has always been risk based pricing in the mortgage market. Though, until now low risk borrowers that have been the most responsible with their credit, and who are putting more skin in the game with larger down payments have been rewarded with lower borrowing costs and interest rates.
Now the Federal Housing Finance Agency is working to subsidize the risk on lending to those with bad credit scores by charging lower risk borrowers more. Then using that money to give low rates to others.
For those purchasing a home or refinancing with a 680 credit score, on a $400k loan can expect to pay around an additional $40 a month, according to coverage from the Washington Times. Right during a time when mortgage rates have already doubled, and housing prices have been sky high, along with other inflation.
Trouble Continues To Brew In The Banking Space
Since the Great Recession FHA and similar loan programs have effectively acted as the new ‘exotic mortgage’. The types of loans that were blamed for the 2008 financial crisis. Loans with low down payments, to those with weak credit, and most likely to default.
This new rule seems to build on that, creating even more risk. Right when banks and lenders are already failing at great scale.
This may inflate that bubble even more, filling it with highly risky loans, and setting those lower credit borrowers up to lose everything.
Where it applies to ‘government backed’ loans, the other risk is of course that all taxpayers will end up footing the bill, and have to bail out these organizations for reckless lending.
The Opportunities
In the mid to long term this seems almost certain to lead to more distress, mortgage defaults, and in turn, more discounted homes and loan notes for sale.
At the same time, in the short term, it could mean an opportunity for those with weak credit and low down payments to still buy a home of their own. Which is fantastic for those that can really afford to sustain those homes long term.
This may be a new area of focus for some investors, who can flip and wholesale more affordable homes to lower income borrowers. Helping to fill the gap between distress and demand.
The good news is that, as a real estate wholesaler, you already don’t need a great credit score or any down payment with transactional funding. It’s a great way to make money in real estate and then pay cash for your own house.
