When navigating the mortgage process to purchase a home, you might come across a term called Loan-level Price Adjustment, or LLPA. While it may sound complex, it’s essential to understand this concept to make the most informed decisions about your mortgage. The LLPA fees charged by Fannie Mae and Freddie Mac have been the subject of persistent news reports, which claim that borrowers with high FICO credit scores pay higher fees than those with low scores. This is simply erroneous information, and some of these reports have been misrepresented throughout the media.

Interestingly enough, the media backlash and lobbying by the National Association of Realtors and Federal Housing Finance Agency have actually created an impact and the recent change in LLPA fees has now been rescinded and will not occur. The key is to understand the facts about the circumstances, not the media hype. LLPA fees have not been eliminated. The changes proposed have simply been rescinded. In this blog post, we’ll break down the basics of LLPAs in easy-to-understand language, so you can understand the purpose of these fees and what the actual proposed change had been. Let’s take a closer look at these changes.

What is LLPA?

A Loan-level Price Adjustment is an extra fee lenders may apply to a mortgage loan based on specific factors. This fee helps lenders manage the risk associated with lending money to borrowers, ensuring that the mortgage market remains stable. It also aids the lenders in pricing their loans accurately based on the level of risk associated with each loan, mitigating their risk, and ensuring that they are compensated for high-risk loans.

How does LLPA work?

Loan-level Price Adjustments have been permitted in conventional mortgage lending since April 2008. They were created in response to the financial crisis when Fannie Mae and Freddie Mac wanted to increase their capital and reduce risk. Rather than changing fees across the board, they implemented loan-specific pricing adjustments to vary the price of a loan based on its risk level. As a result, safer borrowers are rewarded with lower fees and mortgage rates, while higher-risk borrowers have higher fees. The sliding scale of LLPAs can result in a reduction in a borrower's mortgage fees providing borrowers with a crucial incentive to keep their credit score and financial condition in good standing.

Lenders consider numerous factors when assessing LLPAs for mortgage loans. Some of these factors include:

The credit score of a borrower indicates their ability to repay loans. The higher your credit score, the lower the risk associated with the loan, and the lower the LLPA fee.

The amount of money a borrower puts down on a property might have an impact on the LLPA. A bigger down payment generally decreases the lender's risk, leading to a lower LLPA fee.

The LLPA can be influenced by the type of property being purchased. Properties that are considered riskier, such as condos, manufactured homes, or investment properties, may have a higher LLPA fee.

The purpose of the loan such as buy, refinance, or cash-out refinance might also have an impact on the LLPA. Purchase loans are considered less risky than refinance loans, so they typically have a lower LLPA fee.

The proposed LLPA changes that were supposed to go into effect this year involved a pricing structure that increased fees for many borrowers with a credit score of 680+ and reduced fees for most borrowers with a score lower than 680. Although a lower credit score will still cost more, it would have helped save on upfront fees and closing costs for some borrowers with a credit score below 680. For example, if your credit score is 659 and you borrow 75% of the home's value, you'll pay a fee equal to 1.5% of the loan sum, whereas you'd pay no cost if your credit score was 780 or higher. However, prior to these changes, a person with a 659 credit score would have had to pay a whopping 2.75% fee. On a $300,000 loan, that's a $3,750 difference in closing costs. Furthermore, the credit score thresholds to benefit those with higher credit changed from a minimum of 740 to requiring scores of 760 to 780 to qualify for the lower fees.

Do take note that LLPA fees can vary between lenders. Therefore, it is always a good idea to shop around and compare loan estimates from multiple lenders to find the best terms and fees. In addition, there are some strategies that borrowers can use to reduce their LLPA fees. For example, improving your credit score, increasing your down payment, and choosing a lower-risk property type can help to lower your LLPA fee and potentially save you money over the life of the loan.

It’s important to work with a mortgage professional who can help you navigate the process and find the best loan options for your needs. If you would like a list of trusted mortgage lenders, please do not hesitate to contact us and we’d be glad to set you up with our trusted resources.