The Truth about the Loan Level Pricing Changes and Rates

Dated: May 3 2023

Views: 152

Over the last few weeks or so, many news outlets have been publishing information that may lead many to think that borrowers with a higher credit score will be paying more for their mortgages versus borrowers with lower credit scores. AND that these borrowers will be subsidizing the lower credit score borrowers. That is simply not true. Let’s break this down.

  • Fannie Mae and Freddie Mac are the end investor in all traditional conventional mortgage loans. They are regulated by the FHFA. The FHFA announced in January that they were going to implement what are called loan level price adjustments across the board.  There have always been and will always be loan level price adjustments. This is how investors manage risk which in turn provides liquidity to the real estate market in the form of mortgages.  You may see these in the version of the acronym LLPA.
  • Some of you may have seen the colorful matrix floating around. There are 81 cells in the LLPA matrix. It’s not like any lender has 81 different prices for a borrower. The lenders average price by LTV and make it up on delivery through their capital markets teams. The borrowers really won’t know the difference in any significant way as a result of this.
  • Mortgage rates are based on several factors and again this is done to mitigate potential risk. The categories are based on the credit score, loan amount, loan to value and loan purpose (is it a primary home versus Investment versus condo, etc.) What we are seeing with these changes is that they primarily impact the credit score “buckets”. It is no secret that the highest credit score borrowers will receive the best interest rate.  Prior to these changes a 760-credit score was the “best” credit score. Now the best is thought to be 780.
  • These credit scores are published by mortgage companies in groups or as I call them buckets.  780 and higher is a tier, 760 to 780 is a tier, 740 to 760 may be a tier, etc. You get my picture. So that has all shifted. So, While it's true some borrowers in the higher credit score band may be paying more for their mortgages compared to previous months, the pricing adjustments for credit score still favor borrowers with a higher credit score just as they always have.
  • Let’s look at an example that is based just on the credit score and not the property type:
    • A borrower with a 760-credit score may be paying a fee of 0.625%. Before these changes were made that borrower may have paid around .125%.
    • A borrower with a 620-credit score will be paying a fee of 2.750%. Those borrowers are so much better off using the FHA loan.
  • Another important note is that these LLPA changes were announced in January of 2023, and have been in place by most lenders in the past few weeks or months. The reason these have been in place for a while now is these changes take effect for loans purchased by or delivered into MBS as of May 1st.  Lenders need time to close, deliver, and have the loan purchased by either an investor, Fannie Mae, or Freddie Mac to meet the May 1st deadline. For most borrowers, these fees have already been in place if their loans have not closed already.
  • There have been some incredibly positive changes that were part of this effort. If you are a first-time homebuyer, the previous LLPA’s were removed!!!   That means that a first-time homebuyer regardless of their score will get a better rate!  FHA also reduced the monthly portion of the mortgage insurance from .85% to .55%. That is HUGE and has made a big change in what an FHA borrower can qualify for.

At the end of the day this information became sensationalized by the media. What the general public doesn’t realize is that these things change sometimes as the wind blows. It is very likely this will again change as we move through the rest of the year. Rates are going to be incredibly volatile until inflation is tamed. My suggestion is and always be to buy the house and don’t get caught up in the number known as the “rate”. Be more concerned about the payment. Rates will come back down but home prices will not!

-Kriten Eck, NextMortgage

Blog author image

Monica Luzarraga

For more than two decades, I've been working as a real estate agent and co-owned a real estate development company. Throughout this time, I have had the pleasure of working with a diverse range of cli....

Latest Blog Posts

Homeownership Horrors: What Can Go Wrong

Homeownership can be scary.Real estate agents have seen the unintended difficulties their clients can face after buying a home. Let us help you put some worries aside.Lesson: Get a Home InspectionA

Read More

Proposed Settlement Agreement in Sitzer-Burnett, et al v NAR

NAR Agrees to Proposed Litigation SettlementBy Amy ConnollyFlorida Realtors President Gia Arvin said the state association “looks forward to continued opportunities for our members to provide

Read More

Florida's 2024 Legislative Real Estate Victories

Florida's 2024 legislative session just ended, delivering big wins for Realtors©, property owners, and communities across the state. At the center of this advocacy success was the Realtor©

Read More

Understanding Your Credit Score

Did you know that credit scores are calculated differently for a mortgage loan? Every online service and industry uses different scoring models to come up with a credit score that will be used to

Read More