A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. It varies by borrower, based on loan traits such as:
- loan-to-value (LTV),
- credit score,
- occupancy type,
- Purchase Rate and term refinance or Cash Out refinance
- and number of units in a home1, 2, 3, 4 units.
Borrowers often pay LLPAs in the form of higher mortgage rates.
You may remember 2008? As a mortgage broker and lender at that time I remember how crazy the market was. I would go to work and each week I didn’t know which lender or bank would be closing the doors and not fund loans. These were scary times.
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.
To mitigate some of the risk, Loan-level pricing adjustments (LLPA) were introduced, so they 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. Check the loan process here
Figure 1, Fannie Mae assesses LLPAs for LTV and credit score. The higher the LTV, the greater the risk for the lender, so the LLPAs are higher as LTV goes up. You’ll also notice that the LLPAs get even more expensive as credit score gets lower.
if somebody with a 96% LTV and a 619 qualifying credit score is assessed a steep 3.75% in LLPAs for those risk factors.
i.e. if the loan amount is $100,000, the total LLPA pricing hit would equal $3,750.
Please note that LLPAs stack on top of each other.
Credit score is 619,
and it’s a cash out loan,
the total LLPA “hits” are 3.000%
Credit score/LTV (Figure 1) and 2.625% for cash out (Figure 2), for a total pricing hit of 5.625%. On a $100,000 loan, that’s a total of $5,625 in risk-based pricing. Though LLPAs work like points, you won’t necessarily pay them as added fees on the loan. The lender may instead absorb all or most of the LLPA costs in exchange for a higher interest rate on the loan.
Check the loan process here and call Racheli – “Its’s like talking to 100 banks”-like one of her clients said.