A new federal rule aimed at improving mortgage accessibility could result in higher prices for homebuyers with good credit while smoothing the path for riskier borrowers.
Since May 2023, mortgages delivered to the Federal Housing Finance Agency have faced changes to their loan-level price adjustments. These changes affect conventional mortgages and refinance loans purchased by Fannie Mae and Freddie Mac, adjusting conventional mortgage interest rates higher for some homebuyers and lower for others.
[Read: Best Mortgage Lenders]
What Are LLPA Fees?
, or LLPAs, are risk-based price adjustment fees. These mortgage fees are tied to a range of factors, including your credit score, loan-to-value ratio and the type of mortgage. Lenders typically use LLPAs to determine your mortgage interest rate.
LLPA fees are a percentage of your loan amount. For example, if your mortgage is $300,000 and your LLPA is 1%, you’ll pay a fee of $3,000. These fees may be rolled into your closing costs or included in your loan’s interest rate.
“When you apply for a loan, LLPA determines your interest rates,” says Dave Krichmar, a mortgage banker in Houston. “Your discount points or rate cost will go up or down based on LLPA.”
What Changed With LLPAs
The changes to LLPAs included the addition of higher credit tiers and lower LLPAs for homebuyers making low down payments
. While a 740 or higher FICO score could previously get you the best mortgage rate, you now need a score of 780 or higher to get the lowest rates. LLPAs also are going down across all credit tiers for homebuyers with a down payment of less than 5%.
For a very well-qualified buyer with an excellent credit score and 20% down payment, the LLPA fee dropped by 0.125%. On the other end of the spectrum, a fair credit borrower with 3% down has a fee that’s 1.25% lower. But the buyer in the middle with good credit and 10% down faces an increase of 0.25%.
| FICO Score and LTV | LLPA Before May 1 | LLPA After May 1 | Difference |
| 780, 80% | 0.5% | 0.375% | -0.125% |
| 715, 90% | 1% | 1.25% | 0.25% |
| 640, 97% | 2.75% | 1.5% | -1.25% |
LLPAs decreased across all credit tiers for homebuyers with a down payment that’s less than 5%. Fannie Mae cited increasing support for historically underserved borrowers as a reason for changes to the LLPA framework.
Krichmar says this change takes pressure off homebuyers making a minimum down payment, regardless of their credit score.
[Read: Best Mortgage Refinance Lenders.]
While LLPAs decreased for homebuyers in lower credit score tiers and those with lower down payments, they increased for some homebuyers with good credit, pushing interest rates higher for those affected. Still, homebuyers with higher credit scores and down payments will likely have a lower LLPA — and corresponding interest rate — than those with lower credit scores and down payments.
For example, a homebuyer with a 740 credit score and a 20% down payment will have an LLPA of 0.875%, while a homebuyer with a 640 credit score and a 3% down payment will have an LLPA of 1.5%.
Another recent adjustment to LLPAs took effect on Dec. 1, 2022, granting LLPA waivers to qualifying borrowers. There’s no LLPA fee for first-time homebuyers with income at or below the area’s median income, HFA Preferred loans and Duty to Serve loans.
What Homebuyers Can Do
If you’re a homebuyer navigating the changes to LLPAs, Krichmar recommends considering more mortgage scenarios than you might have in the past. For example, you might run the numbers on putting down more than 20% or fine-tuning your credit to get the best rates. Or you might look at low-down-payment options to see how that affects your mortgage interest rate and the cost to buy discount points.
“Now more than ever, make sure you ask for several mortgage options so you can see the difference,” Krichmar says.
How LLPA Fees Influence Mortgage Costs
Let’s say you’re buying a $300,000 home with a conventional mortgage. If you have a credit score of 780 or higher and put down 25% or more, you won’t pay an LLPA fee. But if your credit score and down payment are slightly lower — 760 and 20% down — your LLPA fee is 0.625%. On a $300,000 mortgage, that’s a fee of $1,875.
But a larger down payment doesn’t always mean a lower LLPA. These fees tend to drop lower as private mortgage insurance, which kicks in if you put down less than 20%, reduces the risk. And there’s another drop-off if you put down less than 5%.
How Homebuyers Can Manage LLPA Changes
If you’re a homebuyer navigating the changes to LLPAs, Krichmar recommends considering more mortgage scenarios than you might have in the past. For example, you might run the numbers on putting more than 20% down or fine-tuning your credit to get the best rates. Or you might look at low-down-payment options to see how that affects your mortgage interest rate and the cost of buying discount points.
Consider some of the ways you can minimize your LLPA fee:
— Improve your credit score, which can lower your LLPA.
— Save for a larger down payment, particularly 20% or more, to reduce your LLPA.
— Get quotes from multiple lenders to find the best terms.
— Consult a mortgage broker for guidance in understanding your choices.
“Now more than ever, make sure you ask for several mortgage options so you can see the difference,” Krichmar says.
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What FHFA’s New Pricing Adjustment Means for Your Mortgage Rate originally appeared on usnews.com
