Loan-Level Pricing Adjustments (LLPA)
A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. Loan-level pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), credit score, occupancy type, and number of units in a home. Borrowers often pay LLPAs in the form of higher mortgage rates.
LLPAs Affect Conventional Mortgage Borrowers
Each week, government-backed Freddie Mac publishes its Primary Mortgage Market Survey (PMMS), a review of the week’s average mortgage rates available to U.S. borrowers.
For many borrowers, however, these rates can prove elusive.
Freddie Mac may report today’s mortgage rates firmly in the 3’s, but when you call a lender, you get a quote which is substantially higher.
Your lender’s not pulling a fast one on you. Your mortgage rate may really be higher than what Freddie Mac reports — particularly if you’re using a conventional home loan to purchase your new home due to the LLPA.
The bump to your mortgage rate is the result of a government-mandated, rate-altering program based on something called “risk-based pricing”.
More formally, it’s known as the loan-level pricing adjustment (LLPA) program.
What Is a (LLPA) Loan-Level Pricing Adjustment?
Loan-level pricing adjustments (LLPA) are not new. They were introduced into conventional mortgage lending in April 2008, and LLPAs remain in effect today.
They exist for good reason, too.
Toward the end of last decade, as government-backed loans began going bad, Fannie Mae and Freddie Mac realized that they were undercapitalized and over-exposed to risk.
Both organizations were losing money — quickly. They decided to increase fees. However, neither group wanted to make an across-the-board fee change. Both groups understood that some loans were less risky than others.
From this want to collect more fees, loan-level pricing adjustments were born.
Loan-level pricing adjustments are, literally, adjustments to the “price” of a loan. Loan prices are what determine a borrower’s mortgage rate.
Higher loan prices translate into higher mortgage rates.
Loan-level pricing adjustments are the government’s way of raising prices for “riskier” borrowers without putting a penalty to “safer” ones. Similar to an auto insurance policy, a person loaded with risk will pay a higher premium.
LLPAs can change a person’s mortgage rate by 100 basis points (1.00%) or more.
Risk Factors That Lead To Loan-Level Pricing Adjustments
The loan-level pricing adjustment system contains more than a dozen “risk characteristics”. Nearly all conventional mortgage borrowers are affected by at least one.
LLPAs are cumulative, too. If you trigger 4 adjustments, you’re required to pay all four.
Loan traits which affect your loan-level pricing adjustment include:
- Mortgaging a home as a investment property
- Mortgaging a condo with less than 25% equity
- Mortgaging a multi-unit home (i.e. 2-unit, 3-unit, 4-unit)
- Doing a cash-out refinance at any loan-to-value
- Subordinating a second mortgage via a piggyback loan
There are only a few scenarios which avoid loan-level pricing adjustments completely. One such scenario is when a borrower with a credit score over 740 purchases a single-family, detached home with a downpayment of 40% or more with no subordinate financing.
Everyone else is subject to LLPAs.
LLPAs Don’t Apply To FHA, VA, or USDA Loans
Loan-level pricing adjustments are neither discretionary fees, nor “profit” to a bank. They are fees assessed by Fannie Mae and Freddie Mac and there’s way to skip them.
However, if your LLPAs become to large, you may find it smarter to use non-conventional financing for your next mortgage loan.
Loan-level pricing adjustments apply to Fannie Mae and Freddie Mac loans only. They don’t apply to FHA loans, VA loans, or USDA loans.
Therefore, if you’re purchasing a home with 2 units or more, or if your credit score is below 700, you’ll likely find it more cost-effective to purchase a home using an FHA mortgage instead of a conventional one — especially if you plan to make a low-down payment.
Or, if you can qualify for a VA mortgage based on experience in the military; or, a USDA loan because you’re purchasing in a less-densely populated part of the country, it’s best to explore those options, too.
About the time to ignore the effect of loan-level pricing adjustments on your loan is when you’re using special conventional mortgage programs such as the HomeReady™ mortgage, which puts a cap on the amount of LLPAs a borrower can accumulate and allows for just 3% down.
HomeReady™ is terrific for home buyers in low-income areas, and for buyers who rely on income from boarders to help make ends meet each month.
What Are Today’s Mortgage Rates?
Today’s mortgage rates are low, but because of loan-level pricing adjustments, not all rates and lenders are created equal and not all borrowers will get access to the Freddie Mac published rates.
Call today for a FREE quote!
The Beach-Greco Mortgage Team