Loan Level Pricing Adjustments To Rates On Home Mortgages

by Gustan Cho

This Article Is On Loan Level Pricing Adjustments To Rates On Home Mortgages

Mortgage rates are at historic lows. After the Central Bank has lowered interest rates to zero percent, mortgage rates have started to tumble like never before. 30-year fixed mortgage-rates are under 3.0% while 15-year fixed-rates are under 2.5% for prime borrowers. The housing market is booming due to more demand for homes than available inventory and historic low mortgage rates. However, mortgage rates announced are rates for prime borrowers. What is a prime borrower?  A prime borrower is a mortgage loan applicant with over 740 credit scores, 20% down payment, under 43% debt to income ratio, and excellent credit profile buying a single-family home. Loan Level Pricing Adjustments, commonly referred to as LLPAs, are pricing adjustments to mortgage rates charged by lenders due to higher risk tolerance levels. Therefore, everyone gets quoted a par rate. Then the lender will tack on pricing hits for risk tolerance they take. Many of us heard the saying of the greater the risk, the greater the rewards. The high rewards for lenders is charging higher mortgage rates.

Understanding Loan Level Pricing Adjustments

What are loan price adjustments

Every mortgage loan applicant starts at a base raw rate. If a borrower has perfect credit and the lender considers them a prime borrower, then there is no LLPAs. However, most home mortgages will have LLPAs. Loan Level Pricing Adjustments are pricing hits lenders charge based on the risk level they take on. Not all lenders have the same pricing hits on LLPAs. Some lenders may have higher LLPAs on manual underwriting while other lenders may only charge a small amount. Typical LLPAs charged by lenders are credit scores, loan to value, manual versus automated underwriting system, type of property, occupancy type, debt to income ratio, loan size, and other factors lenders considered as added risk. Borrowers pay loan level pricing adjustments in the form of higher mortgage rates and/or discount points.

How Do LLPAs On Conventional Loans

Conventional loans are not backed by any government agency like FHA, VA, USDA loans. Then why do lenders have the borrowers meet Fannie Mae and/or Freddie Mac Agency Guidelines?  This is because lenders fund mortgages using their warehouse line of credit. Once lenders fund and close the loan, they will sell the loan on the secondary market. With the proceeds, they pay down the warehouse line of credit and originate and fund more loans. This is how lenders make money. The conventional loans these lender sell on the secondary market need to conform to Fannie Mae and Freddie Mac Agency Guidelines. Fannie Mae and Freddie Mac will not purchase any loans that do not conform to their guidelines. Therefore, lenders make sure all conventional loans conform to Fannie Mae and/or Freddie Mac Agency Guidelines. When prime mortgage rates are released in the news wires, those rates are mortgage rates for prime borrowers. Depending on your credit profile and the type of property and occupancy, LLPAs need to be added to par rates.

Loan Level Pricing Adjustments On Conforming Loans

Since conventional loans are not backed by a government agency, conventional loans are more sensitive to credit scores than government loans. There are higher rate costs versus lower credit scores. What this means is if a borrower with a 640 FICO needs a quote on mortgage rates on a FHA versus Conventional loan, the rate on the FHA loan may be quoted at 3.00%. The rate on a conventional loan may be quoted at 4.125% due to the large LLPAs. The rate with LLPAs added is called risk-based pricing. A 640 credit score is considered very low on conforming loans. Therefore, borrowers with lower credit scores will have a higher pricing hit on conventional loans.

Factors Lenders Consider Risk-Based Pricing

The following factors will determine mortgage rates on conventional loans. Lenders will have LLPAs on the factors below:

Credit Scores:

  • The lower the borrower’s credit scores, the higher the risk for the lender
  • Therefore, the lower the credit scores, the higher the LLPAs, the higher the mortgage rates

Loan To Value:

  • LLPAs on LTV apply more so on conventional loans
  • There is no LLPAs on LTV on government loans due to the government guarantee
  • The higher the loan to value, the higher the risk tolerance for the lender
  • The higher the loan to value, the higher the rates

Loan Size:

  • There are LLPAs on loans under $250,000
  • LLPAs depends on the individual lender

Loan Level Pricing Adjustments On Type Of Property

Is the loan price adjustment affected by the type of property

Type Of Property And Location:

  • There is no LLPAs on owner-occupant primary mortgages.
  • Investment properties will have LLPAs.
  • Single-family homes are considered the property type with the least risk.
  • Condominiums and two to four unit multi-family homes are considered riskier loans.
  • Therefore, riskier loans due to property types have LLPAs.

High-Balance in high cost areas will have LLPAs:

  • The maximum Conforming Loan Limit for 2020 is capped at $548,250.
  • Conforming Loan Limits are higher in high-cost areas like Los Angeles County, California.
  • Maximum Conforming Loan Limits in high-cost areas is capped at $822,375 on single family homes.
  • Conforming Loans that exceed $548,250 is called high-balance conforming loans or Jumbo Conforming Loans.

Debt To Income Ratio:

  • High debt to income ratio is considered high risk for lenders
  • There are LLPAs on high debt to income ratio

There are pricing hits on all cash-out refinance mortgages. Cash-out is considered riskier than rate and term refinance. It is best to consult a loan officer months before applying for a mortgage loan. Whether it is a home purchase or refinance loan, understanding loan level pricing adjustments and preparing for a mortgage months before applying can get you the lowest rates. Getting the lowest rates means tens of thousands of dollars in savings over the term of a mortgage. The biggest factor in determining mortgage rates are credit scores. The team at CLN Mortgage Group have some quick tips and tricks in boosting your credit scores.

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3 comments

Michael Fitzgerald November 23, 2020 - 4:05 am

Are there loan level pricing adjustments for under 580 credit scores?

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Jeff Bradford November 27, 2020 - 12:49 am

I’m self employed, I went through a divorce, I need to get my ex off the mortgage. I house is worth 450,000+, I owe 326,500, I have 10k in the bank my median credit score is 748. I have no bills (credit card or vehicle). Problem is I write so much off each yrs, it gives me a high dti Can you guys help me. I need to get my ex wife and her new husband off my back as soon as possible. I am open to non-QM loans. I have been watching the videos of Gustan Cho Associates and Alex Carlucci.

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Rapid Rescore By Lenders Increases Credit Scores In Days December 2, 2020 - 8:10 pm

[…] Higher credit scores mean lower mortgage rates […]

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