WHAT ARE LOAN LEVEL PRICE ADJUSTMENTS? - OR OTHERWISE KNOWN AS LLPA'S IN MY INDUSTRY.
HERE IS WHAT THE CONSUMER NEEDS TO KNOW about loan level price adjustments.
What are they? Do all borrowers get them? Can they be avoided?
Fannie Mae reeling with losses on mortgage loans has implemented "loan level price adjustments". These adjustments can change the interest rate significantly, or can increase fees at closing for borrowers. These fees apply to the mortgage loans that are underwritten according to fannie mae guidelines.
When housing is struggling to recover it would make sense that there not be roadblocks at what seems every turn. However, loan level price adjustments can appear to be just that. Of course Fannie's take is that they have these adjustements because of risk involved.
Add to this the fact that not only does Fannie Mae have loan level price adjustments, but lenders can and do often have their own "overlays" on top of that and it is clear many borrowers will not refinance who would otherwise like to. Or the extra costs could prevent or make more difficult a buyer from purchasing a home.
What are loan level price adjustments?
Back in the day I would often say to a borrower, it is black and white, you either qualify or you do not for the loan. If a borrower was approved, in the case of a primary residence, single family home, there was no difference in rate if the credit score was 660 or 800. Sure, there were adders if the home was not owner occupied or was multiple family. That is not the case today.
Today we mortgage loan originators have a grid to refer to when pricing mortgage loans, as a matter of fact, several grids. There are some home mortgage loans that carry additional fees because of the credit score, property type, loan product, equity or occupant for instance.
Does everybody get loan level price adjustments on every loan?
The short answer is NO!
If an owner occupant borrower has a credit score over 780 (at some lenders, perhaps less at others) and a 25% equity position, then there may not be additional loan level price adjustments on a conforming fannie mae loan.
Often it is not a matter of whether a borrower can qualify for a loan, it is at what cost. When borrowers are seeking to refinance to save as much as possible on their home mortgage it does not always make sense to do so when the extra fees are added up.
Suppose a borrower wants to refinance a $200,000 mortgage loan. If they happen to have a 660 credit score and 20% equity, and also a second mortgage, they would have additional fees of $9000 at one lender I looked at. That is a lot of equity to give up, particularly if you consider the fees for regular closing costs, taxes and insurance.
What can a consumer do about loan level price adjustments?
Credit scores have a huge impact on the loan level price adjustments. The higher the score, the less the adjustment on fannie mae loans. Some things a borrower can do:
Get pre qualified, know your score and if possible make every effort to lift that score before making a home purchase or refinancing a home mortgage. A borrower may not be able to avoid all the loan level price adjustments, but perhaps with a little planning can reduce them.
Work with a trusted source. I always say loan originators are working to make a living and there are a lot of sales professionals in the business. A borrower wants to get a mortgage loan, not be "sold" one. Borrowers need to fully understand and have explained to them what they are getting.
It may make sense for the loan level price adjustments to be rolled into the rate. What this means is the borrower takes a higher interest rate, the costs are rolled into the rate. It is always worth comparing the lowest rate possible with the lowest closing costs possible.
Another thing a borrower can do is look at all the loan programs available to him. FHA does not have the extensive loan level price adjustments that Fannie loans do. This may be an option. There are pros and cons for all the loan programs, the borrower should do his/her homework to be sure they are applying for the best mortgage loan program for their needs.
It is frustrating to borrowers who want to get the best interest rate available when they know full well they are excellent credit risks. The ultimate test it would seem should be whether one pays their bills on time, but that is no longer always the case when it comes to home mortgage financing.
