Freddie Mac Guidelines: Credit Fees for Home Possible Mortgages

What Are Credit Fees for Home Possible Mortgages

Credit fees are upfront charges that Fannie Mae requires lenders to collect on Home Possible mortgages. These fees help offset the additional risk that comes with the program's flexible underwriting guidelines and lower down payment requirements.

The Home Possible program serves low- to moderate-income borrowers and first-time homebuyers. Because these loans often have higher loan-to-value ratios and serve borrowers with limited savings, Fannie Mae uses credit fees to price the additional risk into the loan upfront.

Think of credit fees as a one-time cost that gets built into your loan amount or paid at closing. They're different from ongoing mortgage insurance premiums because you pay them once rather than monthly.

How Credit Fees Are Calculated

The exact credit fee depends on several factors that lenders evaluate when pricing your loan. Your credit score plays the biggest role in determining the fee amount.

A borrower with a 740 credit score will pay a lower credit fee than someone with a 680 score. The difference can be substantial - sometimes several thousand dollars on a typical loan amount.

Your loan-to-value ratio also affects the credit fee. If you put down 5% versus 10%, you'll face a higher fee because the lender has more risk exposure.

The property type matters too. Single-family homes typically have lower credit fees than condos or manufactured homes because they're considered less risky investments.

Credit Fee Caps for Eligible Borrowers

Some Home Possible borrowers qualify for reduced credit fees through the cap program. This benefit can save you significant money at closing.

To qualify for capped credit fees, you must meet specific income limits relative to the area median income where you're buying. The property must also be located in an eligible area, which includes many rural and underserved communities.

Your income cannot exceed 100% of the area median income for the property location. In expensive markets, this income limit can be quite high, while in lower-cost areas, the threshold is more restrictive.

The property must be your primary residence. Investment properties and second homes don't qualify for the credit fee cap benefit.

Required Documentation for Credit Fee Determination

Lenders need specific information to calculate your correct credit fee and determine cap eligibility. Your loan officer will collect this documentation during the application process.

You'll need to provide income documentation that proves your household earnings fall within the required limits. This includes recent pay stubs, tax returns, and employment verification letters.

The lender will also verify the property location and type to ensure it meets the program requirements. They'll use the property address to determine area median income levels and check eligibility for the credit fee cap.

Your credit report provides the score used for fee calculation. The lender will pull this during the application process, so you don't need to provide it yourself.

Why Fannie Mae Requires These Fees

Credit fees serve as a risk management tool for the Home Possible program. The program's flexible guidelines - like allowing down payments as low as 3% and accepting non-traditional credit histories - create additional risk that needs to be priced appropriately.

Rather than making the program unavailable to higher-risk borrowers, Fannie Mae uses credit fees to make the economics work. This approach keeps the program accessible while ensuring it remains financially sustainable.

The fee structure also encourages borrowers to improve their credit profiles before applying. A borrower who waits six months to improve their credit score from 680 to 720 could save thousands in credit fees.

Common Issues with Credit Fee Calculations

Lenders sometimes miscalculate credit fees, especially when determining cap eligibility. Double-check that your lender has correctly identified your area median income and verified your household income against the right threshold.

Credit score timing can create problems too. If your score improves between application and closing, you might qualify for a lower credit fee. Make sure your lender uses the most current score available.

Property classification errors also occur. If the lender incorrectly categorizes your single-family home as a condo, you could pay a higher credit fee than necessary.

Some borrowers assume they automatically qualify for capped fees if they meet the income requirements. However, the property location must also be eligible, and not all areas qualify for the cap program.

Impact on Your Monthly Payment

Credit fees don't directly affect your monthly mortgage payment since they're paid upfront. However, if you roll the fee into your loan amount rather than paying it at closing, it will increase your monthly payment slightly.

A $2,000 credit fee added to a 30-year mortgage at 7% interest would increase your monthly payment by about $13. Many borrowers choose this option to preserve their cash for moving expenses and home improvements.

The credit fee also increases your total loan amount, which could affect your loan-to-value ratio if you're close to a threshold that triggers higher mortgage insurance rates.

References

For the official guidelines, see 4501.10: Credit Fees for Home Possible® Mortgages in the Fannie Mae Selling Guide.