If hearing the date May 1st drops a pit in your stomach, you’re not alone. That means you’ve heard that new Loan Level Price Adjustments are coming, and you’ve been told that they’ll make your interest rates sore! 

What’s more, you’ve been told people with good credit could actually lose the benefit of locking in a good rate while favoring those with lower credit scores. What?! 

In our latest episode, we cut through misleading headlines to break down what these adjustments entail, how they will impact you, and alternative products you can use. BUT, what is a Loan Level Price Adjustment, and why is it important? 

Before diving into the episode, take a refresher course here as we explore what LLPAs are and what they implicate for homebuyers and investors! 

What is a Loan Level Price Adjustment?

A Loan Level Price Adjustment (LLPA) is a fee a lender charges to compensate for the risk associated with a particular loan characteristic. This fee can be either positive or negative, depending on the perceived level of risk. 

For example, a borrower with a low credit score may be charged a higher fee to compensate for the increased risk of default. On the other hand, a borrower with a high credit score may be charged a lower price because they are seen as a lower risk.

LLPAs are charged by both Fannie Mae and Freddie Mac as their guarantee to get you mortgages from lenders. Fannie Mae and Freddie Mac use LLPAs to help manage the risk associated with the loans they purchase and to ensure that they are priced appropriately based on the level of risk.

How Do LLPAs Work?

LLPAs are typically expressed as a percentage of the loan amount. For example, a 1% LLPA on a $200,000 loan would incur a $2,000 fee. The fee amount is added to the interest rate and amortized over the life of the loan, which means that the borrower will pay more in interest over time.

They can be based on various loan characteristics, including credit score, loan-to-value ratio, property type, occupancy status, and loan purpose. 

For example, borrowers buying a second home or an investment property may be charged a higher fee because these properties are considered higher risk.

Why Do Lenders Use LLPAs?

Lenders use LLPAs to help manage the risk associated with their loans. By charging higher fees for riskier loans, lenders can offset the additional risk and ensure they profit from the loan. This helps lenders continue making loans even in uncertain economic conditions and ensures they can remain in business long-term.

In addition, LLPAs are used by Fannie Mae and Freddie Mac to ensure that the loans they purchase are priced appropriately based on the level of risk. This helps to ensure that the housing market remains stable and that borrowers are not taking on more debt than they can afford.

Bottom Line

In essence, Loan level price adjustments are fees charged by lenders to borrowers to compensate for the additional risk associated with specific loan characteristics. These fees are expressed as a percentage of the loan amount and can increase the overall cost of the loan to the borrower. 

Lenders use LLPAs to manage risk and ensure that they are making a profit on the loans they make. By understanding how LLPAs work, borrowers can make informed decisions about the loans they take out and ensure they get the best possible deal.

But knowing this, why are things being flipped on their head? What should we expect after May 1st? Tune into the episode to find out more!