There’s no shortage of recent headlines about changes to mortgage loan pricing, and how those changes might affect you.
The Federal Housing Finance Agency (FHFA) recently announced updates to Loan Level Pricing Adjustments (LLPA) that apply to roughly half of the mortgages in America. These changes went into effect on May 1, 2023. This is the first major overhaul of the LLPAs since they were implemented by the FHFA in 2008.
“The recent change to the LLPAs is a reevaluation of the risk associated with making a mortgage loan to a borrower,” says Tiffany Bergsma-Evans, a senior mortgage loan officer at First Fed.
These risk-based price adjustments, which typically adjust the interest rate borrowers are quoted, apply to most loans backed by and sold to Fannie Mae or Freddie Mac.
The complexity of how mortgage loans are priced isn’t always the easiest thing to understand. Scheduling an appointment with a mortgage loan officer early in the process is a great way to understand how these changes might impact you and help you find the best mortgage solution to meet your needs.
Making Sense of Changes
Numerous factors influence LLPAs, including the loan-to-value ratio, credit score, loan purpose, property type, number of units, and even property use.
“Mortgage loan pricing is complicated, but understanding the nuances can save you money,” says Joel Smith, First Fed’s director of mortgage lending. “Those LLPAs are already factored into interest rates quoted to borrowers. A knowledgeable lender should be reviewing all of your interest rate options, not just quoting a single rate.”
For example, a borrower may choose to reduce or “buy-down” their interest rate by paying additional fees or points. Or conversely, it’s possible to reduce closing costs in exchange for a higher interest rate. A borrower’s individual scenario can help determine what rate and option is most beneficial to them.
Bergsma-Evans notes that LLPAs are scenario-specific and may differ considerably depending on the aforementioned factors.
“Every loan’s generally going to have at least one loan level pricing adjustment,” she says. “Depending on the scenario, there could be as many as five or six.”
Much has been made about the changes to the risk-based pricing matrix specifically regarding credit scores. Bergsma-Evans says that, prior to May 1st, the top tier credit score range was 740 to 850. Now, however, new tiers have been established for the credit score ranges of 740 to 759, 760 to 779, and 780 and above.
These new tiers have given many people the impression that borrowers with higher credit scores will now pay more in fees, but Bergsma-Evans says that’s not entirely accurate.
“The new structure could slightly increase LLPAs for certain borrowers with higher credit scores. However, some borrowers with high credit scores or large down payments will see their fees decrease or remain flat,” she says.
Smith echoes the sentiment.
“At the end of the day individuals with higher credit scores are going to receive credit at more favorable terms,” he says. “It’s still beneficial to have a higher credit score.”
Bergsma-Evans says LLPA fees are also lessening in other scenarios, too.
“If you’re refinancing with significant equity, you might avoid LLPAs that you would have had to pay prior to May 1,” she says. “That’s why it’s important to talk to a loan officer who can give you clear guidance and present all available pricing options.”
Those with smaller down payments, she adds, are seeing more favorable rates because borrowers without 20% down are required to take out private mortgage insurance (PMI). This reduces the risk to Fannie Mae and Freddie Mac by passing that risk on to the mortgage insurer, which results in reduced LLPA fees.
For lower income borrowers, Freddie Mac Home Possible and Fannie Mae Home Ready mortgages can be great options, featuring LLPAs that are either capped or waived entirely. Additionally, there are numerous loan programs that are not subject to these new LLPAs, because they are not secured by Fannie Mae or Freddie Mac.
Finding a Lender
With all that in mind, Bergsma-Evans says it’s important to get in front of a loan officer who can help you determine two things: A) what your mortgage-qualifying credit score currently is, as it relates to pricing, and B) what mortgage programs work best with your specific situation. A loan officer can also offer guidance on how to improve your credit score and your borrowing power.
Smith agrees that the value of having an experienced lender is as critical as ever.
“A good lender’s going to dive deeper into your situation to understand what your options are and help direct you to the right program,” he says. “If a lender is only telling you the interest rate, they probably don’t have the expertise or experience to help you figure out your best solution.”
Just because mortgage loan pricing can be confusing doesn’t mean it has to stay that way.
“Bring us your questions!” Smith says. “We are happy to walk through the recent changes and help you understand all of your options to find the best mortgage solution for you.”
Getting an appointment or custom quote from a First Fed lender is a simple phone call or email away, with each lender’s contact info readily available on the First Fed website at https://www.ourfirstfed.com/personal/home-loans/meet-the-team.
First Fed is a member FDIC and equal housing lender.