Understanding the Recent Changes to Mortgage Loan Level Price Adjustments
As a real estate agent, it’s important to keep up with the latest news and trends in the industry. One topic that’s been making the rounds lately is the shocking headlines: “Biden Raises Costs for Homebuyers With Good Credit to Help Risky Borrowers”! And these articles have lead many to believe this “new” fee on mortgage borrowers with higher credit scores will effectively make them pay more interest than those with lower credit scores. However, before you panic and start lowering your credit score, let’s take a closer look at the facts.
The changes in question have to do with Loan Level Price Adjustments (LLPAs), which are based on loan features such as credit score and loan-to-value ratio. These adjustments have been changed several times over the years, with this significant change being announced in January of this year. You can read more about this change at Mortgage News Daily.
Why do we have Loan Level Price Adjustments?
Loan Level Price Adjustments were introduced in 2008 in response to the subprime mortgage crisis. At the time, many lenders were making risky loans to borrowers who could not afford them. These loans often had high interest rates and fees, and many borrowers defaulted on them.
Loan Level Price Adjustments are designed to help lenders avoid making risky loans. By charging borrowers a higher interest rate for riskier loans, lenders can offset the risk of default. This helps to keep the mortgage market stable and prevents another subprime mortgage crisis.
What are the benefits of LLPAs?
Loan Level Price Adjustments have a number of benefits for both lenders and borrowers. For lenders, LLPAs help to reduce the risk of default. This can help to keep the mortgage market stable and prevent another subprime mortgage crisis.
For borrowers, LLPAs can help to ensure that they are able to afford their mortgage. By charging borrowers a higher interest rate for riskier loans, lenders can offset the risk of default. This can help to prevent borrowers from defaulting on their loans and damaging their credit.
What are the drawbacks of LLPAs?
Loan Level Price Adjustments can have a number of drawbacks for borrowers. First, LLPAs can increase the cost of a mortgage. This can make it more difficult for borrowers to afford a home.
Second, LLPAs can make it more difficult for borrowers to qualify for a mortgage. Lenders may be less likely to approve a loan if the borrower has an LLPA.
Finally, LLPAs can be confusing for borrowers. Many borrowers do not understand what LLPAs are or how they work. This can lead to borrowers making uninformed decisions about their mortgages.
Who will be affected by the changes in LLPA?
The updated LLPAs will affect new loans backed by Fannie Mae and Freddie Mac and purchased on or after May 1, 2023. It will also affect any loans delivered into mortgage-backed securities (MBS) with issue dates on or after May 1, 2023. So if you have a current mortgage, no, these changes will not raise your current rate or add additional fees. These changes also do not affect federally backed loans such as FHA, VA, and USDA loans.
Can you explain in more detail how LLPAs affect your interest rate?
Loan-level pricing adjustments are fees that lenders charge borrowers to offset the risk of default. The amount of the LLPA is based on a number of factors, including the borrower’s credit score, the loan-to-value (LTV) ratio, and the property type. LLPAs can be paid in cash or added to the loan amount, which will result in a higher interest rate.
For example, let’s say a borrower with a credit score of 720 is buying a home with a 20% down payment. The borrower is approved for a $300,000 loan with an interest rate of 4.5%. However, the lender also charges a 1% LLPA because the borrower has a credit score below 740. This means that the borrower’s actual interest rate will be 5.5%.
Loan Level Price Adjustments can be a significant cost for borrowers, so it is important to factor them into the cost of buying a home. Borrowers should shop around for lenders and compare LLPA rates before making a decision.
Is it true that a lower credit score means a better interest rate?
Many people are confused by these changes and for good reason. The headlines are causing many to believe that low credit borrowers are getting a discount while high credit borrowers will now pay more. However, this is not exactly true. The fact of the matter is that LLPAs are indeed changing in a way that improves costs for those with lower credit scores and increases costs for those with higher credit scores, but the gap between what they pay is just smaller than it was.
The changes in LLPAs have caused some upset, but they are a tweak of an existing fee structure in favor of those with lower credit scores and at the expense of those with higher credit scores. However, there’s no scenario where someone with lower credit will have a lower fee. So, it’s important to keep paying your bills and not lower your credit score in the hopes of getting a lower rate.
Let’s see the charts!
Let’s look at the two charts below for comparison. The first chart is the one that has everyone up in arms, as it shows the changes to the LLPA fees borrowers get charged. And by the initial look of it, it does look like someone with a lower credit score is getting a better rate than someone with a higher credit score. But that is not the case, the first chart below only shows the % change compared to the old LLPA fee structure. Refer to the second chart below for the OUTRIGHT LLPAs.
The second chart above shows the actual fee structure for the new LLPA fees. As you will see, if you have a score of 660, you’ll be paying significantly more than if you had a 740. Using an 80% loan-to-value ratio as an example, your LLPA at 660 is 1.875% versus 0.875% for a 740 score. That’s a difference of 1%, or $3000 on a $300k mortgage. So no where on the second chart above will you see that someone with a lower credit score is paying less than someone with a higher score. So again, this new change only decreases the gap in the fees for good credit and bad credit borrowers.
Overall, the changes in Fannie Mae and Freddie Mac’s fee structure will impact borrowers differently depending on their credit scores and loan types. The changes in LLPAs may be a little confusing, but understanding the facts can help you make informed decisions when it comes to buying or selling a home, or refinancing your current mortgage. To fully understand the impact of these changes on your individual situation, it’s best to discuss with your lender or financial advisor.