Loan-level price adjustments, or LLPAs, are fees that influence the cost of a conventional mortgage based on a borrower’s risk level. LLPA fees lower mortgage pricing for low-risk borrowers while raising the cost for higher-risk borrowers. Here’s what you need to know about LLPAs if you take out a mortgage.
What Are Loan-Level Price Adjustments?
“LLPAs are adjustments to the price of a mortgage that compensate for risk,” says Casey Fleming, a mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.” Ultimately, it’s what affects your price quote, he says.
When you get a conventional mortgage quote, your lender will determine the interest rate and cost of discount points by using an LLPA fee matrix set by Fannie Mae or a credit fee matrix from Freddie Mac. These matrixes primarily consider your loan-to-value ratio and credit score.
With LLPA fees, riskier borrowers pay higher rates than safer borrowers. So if you’re a low-risk borrower with a low loan-to-value ratio, or LTV – essentially meaning you’ve provided a large down payment – and a high credit score, the cost of your mortgage will generally be lower than for a borrower with a high LTV and a low credit score.
For example, if you have a 780 credit score and put down 20%, you’ll pay an LLPA fee equivalent to 0.375% of the loan. But if you put down 25% with the same credit score, you won’t pay an LLPA fee at all.
If you’re considered a high-risk borrower and want a lower rate, you can get it – but you’ll have to buy discount points to do so.
However, the LLPA matrix considers more than just your LTV and credit score. “Once you’re over 80% LTV, you have to have mortgage insurance, which reduces the risk for lenders, Fleming says. “So in some cases, the LLPA goes down with a higher LTV.”
Loan-Level Price Adjustment Factors
“LLPAs are what can affect your rate, considering your credit score, down payment, property type, and other factors,” says Dave Krichmar, a mortgage banker in Houston.
LLPA fees are calculated based on mortgage lending risk factors including:
- Credit score. The higher your credit score, the lower your risk – and the lower your LLPA fee.
- LTV ratio. A higher down payment – which translates to a lower LTV – lowers lender risk and, therefore, your LLPA fee.
- Debt-to-income ratio. The more debt you have, the tougher it is to keep up with payments such as your mortgage. A low debt-to-income ratio can translate to a low LLPA.
- Loan purpose. Investment properties or second homes are riskier for lenders than primary homes, so LLPA fees are higher for these loans.
- Occupancy. Unoccupied properties require higher LLPA fees.
- Number of units. The more units a property has, the higher the LLPA fees will be.
- Mortgage type. The mortgage product you choose, such as a cash-out refinance, HomeReady or first-time homebuyer loan, can influence LLPA fees or determine whether they apply at all.
“The most significant factors are LTV and credit score, and also the proposed use of the property,” says Fleming. “Investment properties are significantly more expensive.”
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Mortgage Types Affected by Loan-Level Price Adjustments
If you’re facing high LLPA fees, it might make sense to consider nonconventional mortgage loans.
The History of Loan-Level Price Adjustments
LLPAs were introduced to conventional mortgages in 2008 in response to the financial crisis, when Fannie Mae and Freddie Mac were exposed to too much risk from defaulted mortgages. Fannie and Freddie introduced LLPAs to adjust loan pricing based on risk levels, offsetting the higher lending cost to risky borrowers with fees.
“Over time, the folks who buy the mortgages – Fannie Mae and Freddie Mac – figure out where their losses are and adjust the prices to compensate for greater risk,” says Fleming.
The Latest in Loan-Level Price Adjustments
Recent LLPA matrix revisions by the Federal Housing Finance Agency, which oversees Fannie and Freddie, introduced more favorable terms for homebuyers making low down payments and increased the credit score needed to get the best rates.
Under the FHFA changes that went into effect May 1, 2023, the best mortgage rates require a FICO credit score of 780 or higher. LLPAs increased for some borrowers with good credit and generally decreased for homebuyers with down payments of less than 5%. However, homebuyers with high credit scores and large down payments still have the lowest LLPAs.
While these particular matrix revisions are relatively new, alterations to LLPA fees are common.
“The amount of the LLPAs changes all the time to reflect changes in risk,” says Fleming. “Fannie Mae and Freddie Mac have enough data to know what factors cause someone to fail on their mortgage.”
LLPAs have been waived or capped for qualifying loans since December 2022 for first-time homebuyers with income at or below the applicable area median income. The area median income waiver can make it easier for new homebuyers to afford a mortgage. Other loans with waived or capped LLPAs include Fannie Mae HomeReady loans, Home Possible mortgages, and qualifying Duty to Serve and HFA Preferred loans.
How To Manage Loan-Level Price Adjustments
Since LLPAs influence the cost of your mortgage, it pays to know how to make the most of them. Generally, a lender or mortgage broker should present you with various options where you can pay more or less depending on how you balance your rate, points and closing costs.
A mortgage broker can help you consider your options based on your plans. For example, if you plan to refinance, anticipating a rate drop, you might be willing to accept a higher rate with lower upfront costs. But if you plan to keep your mortgage long term, paying points could be a better move. Or you might contribute more of a down payment to get to a better pricing tier.
If you’re unhappy with any of your options, you could pause your home purchase to improve the factors that influence your LLPA. Saving for a larger down payment or improving your credit score could bump you into a more favorable LLPA to make homeownership more affordable.
