Borrowers pay interest and fees in large part to compensate the risks incurred by financial institutions during the loan process. For example, a borrower with a sparkling credit history and significant savings presents little risk of default. Thus, they can often obtain funds on highly favorable terms. On the other hand, a borrower with murky credit and little cash will likely pay a premium. This all is dictated by common sense and the basic laws of economics.
Nonetheless, effective this month, the Biden administration will financially penalize mortgage borrowers with good credit to subsidize those without it. The administration hopes the move will encourage more low-income Americans to purchase homes. However, this sort of government intervention will disrupt critical workings of the market machine. It is also deeply unfair to those home buyers who, through hard work and thrift, have earned their good credit. And the last time the government incentivized credit-risky people to buy homes, the country experienced the subprime mortgage crisis.
The new rule will upcharge many buyers with credit scores above 680, particularly those whose down payments range from 15 percent to 20 percent. For example, “a home buyer with a 740 FICO credit score and a 15 percent to 20 percent down payment will face a 1 percent surcharge – an increase of 0.750 percent compared to the old fee of just 0.250 percent,” the New York Post reports. Such a buyer, with a $400,000 loan at 6 percent interest, will likely pay an extra $40 per month, or $480 per year. Alternatively, per the revised policy, borrowers with subpar credit could save thousands in closing costs. A 659 credit score could well qualify the buyer for a 1.5-percent fee rate instead of the previous 2.75 percent. A 620 credit score could merit a rate of 1.75 percent, down from 3.5 percent.