Loan–Level Pricing Adjustments (LLPA)

What Is a Loan-Level Pricing Adjustment?

Loan-level pricing adjustment (LLPA) is an adjustment of the interest rate on a loan based on the risk assessment of the borrower. The adjustment is different for every borrower because it is being calculated based on a set of variables such as loan-to-value (LTV) ratio, credit score, number of units in a property, occupancy type, etc. LLPAs were introduced as a way to differentiate between the borrowers of different risk profiles in April 2008.

How Does LLPA Work?

LLPA is a fee that is technically charged by Fannie Mae and Freddie Mac. The banks have to pay the fee upfront at the time of loan origination. The borrowers do not have to pay the fee out of pocket at the time of loan origination. Instead, the lenders tend to convert the fee amount into an interest rate premium that a borrower has to pay. The fee itself is calculated based on the amount being borrowed, so it can be calculated easily as a percentage of the loan amount. The following table provides a snapshot of the fee structure issued by Fannie Mae.

LLPA usually affects borrowers with a conforming loan. LLPA looks at a set of variables and adjusts the interest rate based on the values assessed. As a rule of thumb, the lower the credit score, the higher the adjustments for each variable is. The adjustment is separate for every variable and is cumulative. This means that if both LTV ratio and property type trigger pricing adjustments, the interest rate will increase by 1) the amount if only the LTV ratio was triggered and, 2) by the amount if only the property type adjustment was triggered. LLPA is usually triggered by the following events:

• Mortgage a Multi-Unit Property.
• Applying for Cash-Out Refinance.
• Mortgaged Home Is an Investment Property.
• Mortgage a Condo With LTV Ratio Over 75%.
• Applying for Second Mortgage (i.e. Piggyback Loans).

A borrower will likely trigger at least one pricing adjustment when applying for a loan. There are only a few scenarios where a borrower may not need to pay any premium associated with LLPAs. For example, if a borrower is purchasing a single-family home with an LTV ratio of no more than 60% and a credit score of at least 740, then the borrower may avoid paying any LLPA premiums because of no adjustments are triggered.

LLPA and Non-Conventional Loans

LLPA is a fee that is charged using the same system for all conventional loans. It is not a discretionary fee that is up for a bank to charge. Instead, it is a fee that must be applied to all conventional loans according to Fannie Mae LLPA Matrix. LLPA only applies to conventional loans. Non-conventional loans such as FHA loans, USDA loans, and VA loans do not use LLPA.

This means that a borrower may be able to save money on interest payments using a non-conventional mortgage. Suppose a borrower knows that their financial situation triggers some of the LLPA parameters. Because of that, they expect their interest rate to be 4% higher than it would be without LLPA. In this case, the borrower may look at non-conventional loans and see whether they could qualify for one of them. Given that non-conventional loans do not have LLPA, the borrower may be able to save money by getting a non-conventional loan. There are 3 non-conventional loans available, and they all have different qualification requirements.

FHA Loan

One of the most popular types of non-conventional loans is an FHA loan. This mortgage is backed by the Federal Housing Administration, and they target first-time homebuyers who are looking to purchase a home with a low down payment. FHA loans provide an opportunity for borrowers to purchase a house with a down payment of as low as 3.5%. There are certain qualification requirements a borrower must meet to qualify for this type of loan:

• Credit Score of at Least 500.
• Mortgage Insurance Premium (MIP) Is Required.
• Debt-to-Income (DTI) Ratio of Less Than 43%.
• Purchase Home Must Be a Primary Residence.
• Proof of Employment Is Required.

FHA loans are also widely used by people who want to buy a house with bad credit. It is also a great option for first-time homebuyers who are at a disadvantage getting a conventional loan because of LLPA. It is important to note that there is a limit on a loan amount set by the FHA. As of 2022, the limit is $420,680 in most counties.

USDA Loan

USDA loans are backed by the US Department of Agriculture. These loans are issued to people to purchase a property in a rural area of the United States. Just as with FHA, certain requirements must be met by the borrower to qualify for this loan. These requirements include:

• Borrower Must Have a Status of US Citizen or Lawful Permanent Resident.
• House Location Must Have Population of Less Than 20,000 People.
• A House Must Be a Primary Residence.
• Household Income Must Be No More Than 115% Median Income.
• Debt-to-Income (DTI) Ratio Must Be Less Than 41%.

USDA loans do not have a down payment requirement. It is possible to get a USDA loan with 0% down payment, which is very rare. For comparison, usually a 20% down payment is required for conventional loans. It is possible to put a minimum of 5% as a down payment, but the lenders will require private mortgage insurance to insure against default.

VA Loans

VA Loans are backed by the US Department of Veteran Affairs. These loans are designed for qualifying veterans and servicemen. Just like USDA loans, VA loans allow qualifying borrowers to receive a loan with no down payment. They also do not require private mortgage insurance as conventional loans do. On the other hand, the debt-to-income (DTI) ratio must be less than 41% and the credit score must be more than 620 for an individual to qualify for the loan. VA loans are a very attractive option to avoid LLPA, but it is restricted to a certain type of people, specifically people who have served in the military.