Last week, we started talking about credit in general and the new LLPA (Loan Level Price Adjustment) structure. This week, we’re going to dig more into what the LLPA is and what the new changes enforced by Fannie Mae and Freddie mac mean for the average homebuyer. The new LLPA structure will be in full force May 1st and will impact many people so it’s important to know.
What is a Loan Level Price Adjustment (LLPA)?
First off, it’s important to note that loan level price adjustments are not new, the news here is that they are changing which in turn will change how much a buyer pays in mortgage fees. Basically, a LLPA is a fee structure that banks and mortgage companies use to determine the risk of a loan and charges fees appropriate to that. Mortgage company underwriters take risk factors into consideration which is why credit score is important in the first place, it’s an indication of the liability your loan and payment history may be to the bank. An LLPA specifically looks at credit score and Loan to Value (LTV) ratio. A LTV ratio is basically how much a buyer is putting down towards their new home. If a buyer puts $100,000 down on a $500,000 single family home then that is 20% down and the LTV ratio is 80%. Factors such as property type (i.e., single family vs. multi-family structure), and purpose (primary residence vs. rental property) also matter when calculating an LLPA.
What are the biggest changes in the LLPA structure?
The average credit score in the US is somewhere are 700, which is considered good. Currently, a buyer with a good or average credit score and a LTV ratio of around 80% will pay less in LLPA or mortgage fees than a buyer with a lower credit score. However, if a buyer can manage to get their credit score to 780 or above, their fee will not increase. Those who have average credit and average LTV ratio will have the potential to be negatively impacted the most. Supposedly, this change is intended to help first time home buyers and those with low credit scores and high down payments by reducing fees.
Note, this is only the LLPA mortgage fee rate and not the interest rate for the entire value of the home.
A scenario for consideration:
Under the new LLPA fee structure, a buyer who is purchasing a $600,000 single family home as a primary residence and putting down 20% will have a LTV ratio of 80%. Lets also say the buyer has an average debt to income ratio and is obtaining a 30-year fixed mortgage. This coupled with the buyers average credit score of 720 will create an LLPA of about $7,800 as compared to $3,600, before the new structure. This fee increase is because the rate will increase for this buyer scenario from 0.75% to 1.25% under the new structure. (Source: https://www.youtube.com/watch?v=RU_pnIxRtXo)
Overall these were enacted to help first time home buyers and those with lower incomes and higher down payments but we shall see what happens when these are rolled out later this year.
What questions do you have about LLPAs? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]