Posted on April 28th, 2021
In an effort to undo some of the damage the Federal Housing Finance Agency (FHFA) basically caused itself, it’s throwing a bone to so-called low-income families to save on their mortgage.
It all spurs from the adverse market fee the very same agency implemented back in August 2020 to contend with heightened losses related to COVID-19 forbearance and loss mitigation.
The 50-basis point fee, which went into effect on September 1st, 2020, applies to all new refinance loans backed by Fannie Mae and Freddie Mac.
While it’s not a .50% increase in mortgage rate, the fee does get passed along to consumers in the form of either higher closing costs or a slightly higher mortgage rate, perhaps an .125% increase all told.
Either way, it wasn’t well received at the time, and still isn’t today, and this announcement is a somewhat bittersweet one, as it only applies to a certain subset of the population.
Still, the FHFA believes families who are eligible for this new refinance initiative could see monthly savings between $100 and $250 on average.
Who Is Eligible for Adverse Market Fee Waiver and Appraisal Credit?
- Applies to homeowners with incomes at or below 80% of the area median income and loan amounts at/below $300,000
- Must result in savings of at least $50 in monthly mortgage payment, and at least a 50-basis point reduction in interest rate
- Must currently hold an agency-backed mortgage (Fannie Mae or Freddie Mac)
- Property must be a 1-unit single-family that is owner-occupied
- Borrower must be current on their mortgage (no missed payments in past 6 months, 1 allowed in past 12 months)
- Max LTV is 97%, max DTI is 65%, and minimum FICO score is 620
Perhaps the biggest eligibility factor is the borrower’s income must be at or below 80% of the area median income.
This new refinance program specifically targets what the FHFA refers to as low-income families, which director Mark Calabria said didn’t take advantage of the record low mortgage rates.
Apparently more than two million of these homeowners did not bother refinancing, even though it would have been advantageous to do so (and still is).
He noted that this new refinance option was designed to help eligible borrowers who have not already refinanced save somewhere between $1,200 and $3,000 annually on their mortgage payments.
That’s actually a requirement as well – the borrower must save at least $50 per month in mortgage payment, and their mortgage rate must be at least .50% lower.
For example, if your current mortgage rate is 4%, you’ll need a rate of at least 3.5% to qualify.
Additionally, you must currently have a home loan backed by either Fannie Mae or Freddie Mac, and your property must be owner-occupied and no more than one unit.
I assume condos/townhomes work as well, as long as it’s your primary residence.
The adverse market fee is waived as long as your income is at/below 80% of the area median AND your loan balance is at/below $300,000.
If your loan amount happens to be higher, my understanding is you can still get the $500 appraisal credit.
You’ve also got to be current on your mortgage, meaning no missed payments in past six months, and up to one missed payment in past 12 months.
Lastly, there is a maximum loan-to-value ratio of 97%, a max debt-to-income ratio of 65%, and a minimum FICO score is 620.
Most borrowers should have no issue with those requirements as they are extremely liberal.
Is This New Refinance Option a Good Deal for Homeowners?
- It’s an excellent deal for those who haven’t refinanced their mortgages yet
- You get a slightly lower mortgage rate and/or reduced closing costs
- And with mortgage rates already super cheap it could be a double-win to save you some money
- Even though who don’t qualify for this new program should check to see if a refinance could be worthwhile
As Calabria said, many higher-income homeowners probably already refinanced, or are currently refinancing their mortgages to take advantage of the low rates on offer.
Meanwhile, lots of lower income borrowers haven’t for one reason or another, perhaps because they’re not aware of the potential savings or had a bad experience with a mortgage lender in the past.
Whatever the reason, those who haven’t yet and meet the income requirement can take advantage of a refinance without the pesky adverse market fee.
That means they could get a mortgage rate maybe .125% lower than other borrowers who aren’t eligible for this program.
Additionally, they’ll get a $500 home appraisal credit from the lender, assuming the transaction doesn’t already qualify for an appraisal waiver.
Either way, eligible homeowners won’t have to pay for the appraisal, which is another plus to save on the refinance itself via lower closing costs.
It’s actually a great deal for those who haven’t refinanced yet because you might wind up with an even lower mortgage rate and reduced closing costs.
And because your new mortgage payment must be at least $50 cheaper per month, there’s less likelihood of it being a meaningless refinance.
All in all, this is good news for the so-called low-income homeowners who’ve yet to refinance, but bittersweet for everyone else.
Still, mortgage rates remain very attractive for everyone, so even if you have to pay the adverse market fee (and the appraisal fee), it could be well worth your while.
The FHFA said the new refinance option will be available to eligible borrowers beginning this summer, though it’s unclear exactly what date that is as of now.
Read more: When to a refinance a mortgage.