Biden’s New Homebuyer Tax Explained And How To Hack

What did Biden Just Do to Punish Homebuyers with Good Credit?

This change has been cooking for months, and honestly is already baked into the rates buyers are being quoted. It’s one of the reasons the spread between the 10YR Treasury and the 30YR Fixed Mortgage Rate has grown to over 3%. (The 10YR is 3.5% and our mortgage rates are 6.6%… the spread used to be 1.65% spread). The new rule happens to go into enforcement this coming week so it’s just now garnering a lot of attention. I highlighted this new burden back in February on the weekly Market Trends Update.  Check it out here: February 23rd Update

Let’s break it down so you can have a clear understanding of what this new rule is, how it impacts homebuyers and what can be done to lessen the sting.  Don’t get me wrong.. I think this sucks. Like big time. But there is a hack to getting around it too (keep reading).

Federal Housing Finance Agency Director Sandra Thompson said the new rules are designed to “increase pricing support for purchase borrowers limited by income or by wealth” and come with “minimal” fee changes to those who can afford them.

But this is adding insult to injury.

“This confusing approach won’t work and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months,” Former Mortgage Bankers Association head David Stevens said. “To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders. The gap in homeownership opportunity is real. America is facing a severe shortage of affordable homes for sale combined with excessive demand causing an imbalance. But convoluting pricing and credit is not the way to solve this problem.”

So what is it? It’s a change in the pricing model.

This new “hike” will be applied as a  Loan Level Price Adjustments.  LLPA’s is what makes one person’s interest rate different than the next person. It’s an adjustment based on amount down, credit score, what you’re buying (attached or detached) and now debt to income ratio. It’s not the rate itself, but adjustments to the market rate. Well, the LLPA grid just got harsh, punishing those who put the most down and the best credit. Look at the chart below. The red cross in the middle is the pricing hit, hurting those putting 15 to 20% down with credit scores above 680 worst. Now look at the green. The biggest gain is at 3% down with a credit score of 639. Those who have worked to keep good credit are getting hit the hardest.

This change was announced in February and impacts loans purchased starting May 1.

FHFA, or Fannie Mae and Freddie Mac (conventional loans) is requiring these additional adjustments on all loans they purchase as of May 1st. Lenders can’t disclose, close and insure a loan in a day; so these adjustments have been in place on rates for over 30 days. Most lenders released them March 1st. So while this is new and absurd, it’s not happening this week. It happened already.

When the FHFA change was first announced, VA announced it was cutting its funding fee by 0.15% saving Denver Veterans an average of $600-$900 at closing. FHA also announced it was dropping it’s monthly mortgage insurance by 0.30%, saving Denver homeowners an average of $1800 a year!

So What’s the Hack?

Don’t go messing up your credit to get a better rate 😉 Instead, put less down. Take a look at the chart above. For example, if you have a 720 credit score and wanted to put 15% down. Would it benefit you to put 5% down instead? Keeping your funds to buy another investment or… do a recast of your mortgage 45 days after your purchase. Since The Rueth Team and Movement Mortgage services all of our own loans, buyers can easily make an additional principal payment after making the first mortgage payment, lowering the monthly mortgage payment permanently and getting rid of mortgage insurance immediately!

This change impacts a payment an average of $40 a month on a loan of $400k. So while every dollar matters; keep the change and the option of a hack in perspective. Don’t jump off the homebuying fence and back into renting out of fear. Instead choose education!