Understanding Loan-Level Pricing Adjustments (LLPAs)
Have you ever found yourself wondering why some folks get better mortgage rates than others? The secret often lies in something called Loan-Level Pricing Adjustments, or LLPAs. But don’t let this financial jargon throw you off, stay with me, I promise, it’s simpler than it sounds.
Think of LLPAs as a “risk factor” that lenders use to determine your mortgage rate. It’s like inspecting a used car for potential problems before buying. Lenders review your mortgage application, assessing your credit score, loan-to-value ratio, debt-to-income, and property type.
Why are LLPAs Needed
They are needed to minimize risk and ensure secure investments for Fannie Mae and Freddie Mac, government-backed loans. They started because of the mortgage collapse in 2008, where government-backed loans were undercapitalized and overexposed to risk. To say it plainly, they raised prices for those considered to be more of a risk to make sure that type of collapse never happens again.
If lenders spot potential risk, like a lower credit score or a high loan-to-value ratio, they adjust the price, hence the term Loan-Level Pricing Adjustment. In the past, improving your credit score or saving for a bigger down payment would typically result in a better interest rate.
However, as of May 1st, recent changes have made this less certain. Using the updated LLPA matrix, if a person with a credit score of 740 and a 20% down payment purchases a $400,000 home, their fees will increase from $2,000 to $3,500. Conversely, if a homebuyer has a credit score of 640 and only puts down 3%, they will see a significant decrease in fees from $11,000 to $6,000.
This isn’t your grandma’s mortgage, times are changing! Make sure you’re working with a loan officer who can make the proper recommendations for choosing the best loan program and terms for you.
Changes Affect Loan Program Choice
This brings us to the FHA (Federal Housing Administration) loans. Known for their leniency with credit scores and down payment requirements, FHA loans might be your golden ticket if you’re dealing with a lower credit score or a smaller down payment.
I recently encouraged a buyer to use FHA over a conventional loan because of the huge disparity in rate, something I almost never do. It’s important for those who qualify for FHA loans to remember that there are initial fees and ongoing mortgage insurance payments that are required throughout the entire duration of the loan unless a down payment of at least 10% is made. In his case, he wasn’t putting 10% down, but even with the lifetime addition of mortgage insurance, it was the best option.
Some would say the recent changes have leveled the playing field, making FHA loans a possible game-changer for many, especially first-time homebuyers who often find themselves needing assistance, as with my client.
Risk characteristics that lead to loan-level pricing adjustment include:
- Doing a cash-out refinance
- Purchasing an investment property
- Purchasing a condo with less than 25% equity
- Purchasing a multi-unit property (i.e., 2, 3, or 4 units)
There are more than the 4 listed above, which means almost all people who use the conventional loan program are affected by these changes. There are some scenarios that allow you to avoid the adjustments altogether, but everyone else is subject to the new LLPA penalties.
Types of Loans That are Excluded from the LLPAs
- FHA
- VA
- USDA
- HUD Section 184
As your mortgage originator, my role is to help you navigate these changes and find the best possible mortgage rate. It’s crucial now more than ever to explore all your options and find the one that fits your specific situation. Buying a home is a significant decision, and I’m committed to ensuring you get the best deal.
Reach out today! Text me at 863-694-1232, call me at 863-220-6333, or email me at [email protected].
Jonathan K. Davis, NMLS# 314966
