Friday, January 27, 2023 / by Amy Brown
What is a loan level pricing adjustment (LLPA)?
Loan-level price adjustment (LLPA): Risk-based pricing adjustments that vary based on credit score, loan-to- value ratio, type of product, and various other factors, charged at the time of origination.
It is no secret that we are in the midst of a national housing affordability crisis so the Federal Housing Finance Agency declared a relief program this week to assist those buyers who may have less than optimal credit scores. Though this program will greatly assist first-time homebuyers and buyers with low to moderate incomes or lower credit scores, this program will penalize borrowers with good credit scores and moderate down payments. New fees and adjustments to loan parameters are based upon the revamped LLPA matrix which I will attach below.
Timing is everything!
Who does this benefit?
Buyers with credit scores below 720 and/or a debt-to-income ratio equal to or higher than 40% will see a significant drop in fees (closing costs) when purchasing a home.
The effective penalty for having a credit score under 680 is now smaller than it was. It still costs more to have a lower score. For instance, if you have a score of 659 and are borrowing 75% of the home's value, you'll pay a fee equal to 1.5% of the loan balance whereas you'd pay no fee if you had a 780+ credit score. But before these changes, you would have paid a 2.75% fee. On a hypothetical $300k loan, that's a difference of $3750 in closing costs.
Who does this penalize?
There is now the addition of two more tiers of credit score categories with fee applications where previously the tiers stopped at a credit score >740.
Previously with a credit score of 740 or above and 20% down, you would pay, as part of your closing costs on a conventional mortgage, a fee of .5%. After May 1, 2023, that fee will increase for credit score tier 740-759 to .875%, for tier 760-779 to .625%, and for tier >780 to .375%.
While this may not sound like a lot, for a $500,000 mortgage and a credit score of 750, this equals an additional $1875 in closing fees for a total LLPA fee of $4,375.
Also, the highest fee rate adjustment will be if you plan on putting in the 10-19.9% down range so keep in mind that the closing costs will be even higher.
*Note: These rate adjustments only affect conventional and non-conforming loans, not FHA, VA, or USDA.
Today's LLPA rates:
Rates after May 1:
If your credit scores fall within the affected tiers, you plan to finance, and you are looking to put between 10-20% down; buy before May 1.
If you have less than optimal credit or a high debt-to-income ratio, a new home is not a dream! Buy after May 1!
Take a look at the new fee charts below and compare them to today's chart to see how much you will differ depending upon time of purchase.
Your best advisor will be your mortgage broker. If you don't have one, please feel free to call my recommended broker. She is wonderful!
And please call any time with questions!