Mortgage Giants Ordered to Slash Upfront Fee for First-Time Buyers

Federal regulators have ordered Fannie and Freddie to eliminate upfront fees for first-time homebuyers, low-income borrowers, and underserved communities to help make homeownership more accessible.

Upfront fees are to be eliminated for:

First-time homebuyers at or below 100% of area median income (AMI) in most markets or below 120% of AMI in high-cost areas

Fannie and Freddie's affordable home loan programs, HomeReady and Home Possible, which allow for as little as 3% down

Fannie and Freddie's HFA Preferred and HFA Advantage loans, available through state housing finance agencies (HFAs)

Single-family loans in the Duty to Serve program supporting manufactured and rural housing

The upfront fees, sometimes called delivery fees or loan-level price adjustments (LLPAs), that Fannie and Freddie charge lenders can add thousands of dollars in costs. These fees are typically passed to homebuyers, particularly those who are making smaller down payments and pose somewhat of a higher financial risk.

For example, using the current model, a homebuyer with a credit score of 740+ purchasing a home with a 20% down payment can expect an upfront fee of 0.5 percent from Fannie or Freddie. That comes to about $2,200 on a $431,500 loan.

But those with scores below 680 and 3% down can expect an upfront fee of 2.25- 3.75%, or $9,700 to $16,200 on a $431,500 loan.

"Given the ongoing affordability challenges facing homebuyers, FHFA's targeted adjustments … are well-timed and will improve access to credit for low- and moderate-income households, first-time buyers, and minority buyers," commented Bob Broeksmit, president and CEO of the Mortgage Bankers Association.

The National Association of Realtors joins this sentiment and also urges the Department of Housing and Urban Development to lower FHA mortgage insurance premiums to help address affordability challenges.