New Tax on Good Credit

You're not going to believe this, there's a new federal rule that is penalizing homebuyers with good credit. This new rule is coming at probably the worst time as home affordability is at an all-time low with higher home prices and higher interest rates This new rule is actually creating an additional burden for homebuyers and is going to price some homebuyers out of the marketplace because this rule could actually affect up to two-thirds of the potential market for new homebuyers.

This fee was designed to help people with lower credit scores purchase homes and get into homeownership, which is a great thing. The problem is, this is not the way to do that.  A few ways we can help more people purchase homes is to focus on the supply in this country, focus on energy costs, and focus on lowering property taxes, similar to how they are here in Huntsville, where we have low property taxes. We need to focus on the things that will actually drive home values lower in terms of affordability for starter homes and create more starter homes that people can afford. This new rule is just charging additional fees for two-thirds of the borrowers and lowering the fees for the other one-third of the low credit score borrowers, this isn’t even going to help with qualification and doesn’t help with the overall purchase price for low credit score borrowers at all.

Effects of Borrowers with Good Credit

I've heard estimates, that what is basically tax on having good credit, could affect your monthly mortgage payment by about $50 or $60 per month.  That’s $50 a month which is $600 a year but over the life of a loan for a 30-year time frame, that’s $18,000.

Going back to $50 a month doesn't sound like a lot but when home affordability is at an all-time low and we have homeownership rates at a 50-year low, that $50 a month is actually going to break some first-time homebuyers or some would-be homebuyers from being able to get into that first home and start to build wealth and equity through homeownership.

Homeowners have 40x the net worth of renters, over $255,000 on average for homeowners versus $5,500 for renters. This new rule, this new tax for doing the right thing, having good credit, and paying your bills on time is actually going to continue to decrease the homeownership rates in this country. 

Types of Loans This New Rule Affects

The thing that doesn't make sense about all this to me, is why are we making this new rule that applies just to conventional loans? There are different loan products out there like VA loans, FHA, and USDA. Conventional has always been the kind of product that you lean on for people that have a higher down payment and higher credit scores to be able to get the best deal for them.

First-time homebuyers oftentimes lean more towards FHA programs because it's a lower down payment. Even now with they lowered the mortgage insurance premiums on FHA and the rates are actually typically lower on FHA than they are on conventional. So conventional loans are not even the right product typically for these first-time homebuyers that this program will probably target, your FHA is actually a better product in general. So why are we ruining a good product when we have another product that would be better for this type of buyer?

Critics Weigh In

As you can imagine, on such a controversial new rule, there's been a lot of commentary out there.  One of that coming from Gerri Howard the CEO of the National Home Builders Association, said this could decrease homeownership in the middle class. I absolutely agree. We're at a 50-year low for homeownership. Not only is it going to shrink homeownership in the middle class, but it's also going to shrink the middle class in general because the middle-class benefits from homeownership. Unfortunately, we're going to see a smaller and smaller middle class as a result of this.

Mark Calabria, the former Federal Housing Financing Agency Director, said this would ultimately harm both borrowers and financial stability. I agree with that. It's going to obviously harm borrowers with good credit and then it's going to potentially harm borrowers with not as good credit because if this helps them get into a home or a payment that they can't afford this isn't changing credit behavior. This isn't creating financial education, it's not changing anything but a fee structure. If a borrower is getting into a home with a payment they can't afford, it's definitely not good for them either.

Does This Incentivize Bad Credit?

My other big concern with this is what you reward is what you get, kind of Econ 101. If we're rewarding people for having worse credit,  what do you think we're going to get in this country? Probably more people with bad credit, instead of one-third being below 680 that gap may widen. If I've got a score of 695 and I'm right there on the edge between having to pay these extra fees, somebody might think about doing things to worsen their credit, to be able to get that lower fee, which is really unfortunate. That's a bad thing for the overall economy. 

Matt's Advice

This new program could cost you $18,000 or so over the lifetime of the loan.  I think the big thing is if you decide to rent versus own, that decision of renting could cost you a whole lot more in the long run. The average homeowner has a net worth of over $255,000 in this country versus about $5,500 for a renter. This is more of a $250,000 question of owning versus renting.

The other thing, on the bright side, is we're the only country in the world that has a 30-year fixed rate mortgage. That may not sound like a good thing when you amortize and you look at $18,000, but it's a huge deal. If you buy a home in another part of the world and you have to get a five-year or seven-year  adjustable rate mortgage which basically a balloon payment on that mortgage. Let's say you buy in at a 5% rate, you can qualify for that home but five years down the road, that rate is now 7% and you can no longer afford that payment you could be forced to sell your home and move. Whereas in this country you have that guarantee that your payment is going to be consistent for principal and interest over the lifetime of a 30-year loan.

If you're looking to buy, sell, or if you just need advice on your situation, shoot us an email at moving @mattcurtisrealestate.com  or contact us here. We look forward to providing you with that five-star level service.