In a major development that will significantly impact the mortgage landscape, as of May 1st, 2023, Loan-Level Price Adjustments (LLPAs) have been drastically decreased for first-time homebuyers. The new reductions span across various credit score ranges, making mortgages more accessible and affordable for many prospective buyers. According to Fannie Mae, the LLPA changes are part of their “mission of providing stability and liquidity to the mortgage market”. In this article, we’ll explore the implications of these changes, how they benefit first-time homebuyers, and examples of the potential savings borrowers can enjoy.
What are LLPAs?
I wrote an in-depth guide to LLPAs you can find here. In short, LLPAs are fees charged by mortgage-backed securities (MBS) investors to lenders. Then, lenders will often pass on this cost to borrowers through an increased interest rate. Various scenarios can have various associated LLPAs. LLPAs can be influenced by factors such as, credit score, loan-to-value (LTV) ratio, property type, and loan term.
To illustrate the affect of LLPAs on rates, here’s an example scenario:
Say you’re a first-time homebuyer buying a regular, single family home for $300,000, putting down the minimum of 3% on a conventional loan with a 30-year term and you have a credit score of 800. In this hypothetical scenario, you might could get an interest rate of 6%. But, if you have a credit score of 620, once LLPAs are applied, your interest rate would be more like 6.75%, leading to a monthly payment increase of $181.88.
New LLPAs: A Breakdown
Fannie Mae and Freddie Mac impose fees, called “Loan Level Pricing Adjustments”, on lenders for loans that they consider higher risk. Lenders, in turn, often pass these fees on to borrowers in the form of higher interest rates or upfront costs. The recent reductions in LLPAs for first-time homebuyers with a minimum down payment of 3% are as follows:
- A decrease of .625% for borrowers with a credit score of 780+
- A decrease of .5% for borrowers with a credit score of 760-779
- A decrease of .25% for borrowers with a credit score of 720-739
- A decrease of .625% for borrowers with a credit score of 700-719
- A decrease of .375% for borrowers with a credit score of 680-699
- A decrease of 1% for borrowers with a credit score of 660-679
- A decrease of 1.25% for borrowers with a credit score of 640-659
- A decrease of 1.75% for borrowers with a credit score of 620-639
Easier Path to Homeownership
For first-time homebuyers, especially those with less-than-perfect credit, these reductions in LLPAs will make a significant difference in the affordability and accessibility of mortgage loans. With lower fees, borrowers can enjoy reduced interest rates or upfront costs, making it easier to secure a mortgage and achieve the dream of homeownership.
The new LLPAs structure benefits borrowers across the credit score spectrum. For example, a first-time homebuyer, putting down 3%, with a credit score of 780 or higher will now see a .625% reduction in their LLPAs. This means that if their interest rate was 6% before, now it could be more like 5.75%.
Similarly, borrowers with lower credit scores will also enjoy substantial savings. Consider a first-time homebuyer, putting down 3%, with a credit score of 660-679. With the new 1% reduction in LLPAs, they could save $1,455 annually on a $291,000 loan. This is a significant amount that could help the borrower afford a larger down payment or cover closing costs, ultimately making homeownership more attainable.
The real winner here is first-time homebuyers with credit scores between 620-639. In a lot of cases, it may have been too expensive for lenders to even be able to do the loan at all. Now, with a 1.75% decrease in LLPAs, many homebuyers may be able to take advantage having access to the low 3% down payment that is available to first-time homebuyers through conventional loans.
The Big Picture
These examples highlight the considerable impact that the new LLPAs reductions can have on first-time homebuyers. By lowering the fees associated with higher risk loans, borrowers across the credit score spectrum can now enjoy a more affordable path to homeownership. Homebuyers can apply the potential savings resulting from these reductions towards various aspects of the home buying process. You can apply the savings to other things such as down payments, closing costs, or even home improvements.
Conclusion
The recent reductions in Loan-Level Price Adjustments have made it notably easier for first-time homebuyers to secure a mortgage loan. By decreasing the fees associated with higher risk loans, borrowers with a wide range of credit scores can now enjoy substantial savings and more affordable mortgages.