Loan-Level Pricing Adjustments (LLPA): A Complete Guide For Mortgage Borrowers

Loan-Level Pricing Adjustments (LLPA)

A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. Loan-level pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), credit score, loan purpose, occupancy, and number of units in a home. Borrowers often pay LLPAs in the form of higher mortgage rates.

In this article (Skip to...)

• What is a LLPA?
• New 2023 LLPA ruling
• How LLPAs affect borrowers
• LLPA risk factors
• Loans excluded from LLPAs

What Is A Loan-Level Pricing Adjustment?

Loan-level pricing adjustments (LLPA) are not new. They were introduced into conventional mortgage lending in April 2008, and LLPAs remain in effect today.

They exist for a good reason, too.

Toward the end of the last decade, as government-backed loans began going bad, Fannie Mae and Freddie Mac realized that they were undercapitalized and over-exposed to risk.

Both organizations were losing money — quickly. They decided to increase fees. However, neither group wanted to make an across-the-board fee change. Both groups understood that some loans were less risky than others.

From this want to collect more fees, loan-level pricing adjustments were born.

Loan-level pricing adjustments are, literally, adjustments to the “price” of a loan. Loan prices are what determine a borrower’s mortgage rate.

Higher loan prices translate into higher mortgage rates.

Loan-level pricing adjustments are the government’s way of raising prices for “riskier” borrowers without putting a penalty to “safer” ones. Similar to an auto insurance policy, a person loaded with risk will typically pay a higher premium.

LLPAs can change a person’s mortgage rate by 100 basis points (1.00%) or more.

FHFA's New 2023 Loan-Level Pricing Adjustments Ruling

Starting May 1, 2023, the Federal Housing Finance Agency (FHFA) set a new rule in place to help improve housing affordability in the U.S. The new initiative will change the current loan-level price adjustments (LLPAs) structure.

Loans affected by the new format will include conventional mortgages and refinance loans purchased by Fannie Mae and Freddie Mac. FHA, VA, USDA, and HUD Section 184 mortgages are excluded from these new LLPAs.

What does this pricing shift mean for borrowers? Loan-level price adjustments are assessed based on various factors, including credit score, loan-to-value, debt-to-income, loan purpose, occupancy, and mortgage type. The new ruling will reduce LLPAs for low credit score borrowers and those with lower down payments, while slightly increasing LLPAs for homebuyers with good credit.

Based on the new LLPA matrix, someone buying a $400,000 home with a 740 credit score and a 20% down payment would see their fees increase from $2,000 to $3,500. However, a homebuyer with a credit score of 640 and 3% down will notice a substantial fee decrease from $11,000 to $6,000.

How LLPAs Affect Conventional Mortgage Borrowers

Each week, government-backed Freddie Mac publishes its Primary Mortgage Market Survey (PMMS), a review of the week’s average mortgage rates available to U.S. borrowers.

For many borrowers, however, these rates can prove elusive.

Freddie Mac may report today’s mortgage rates firmly in the 6s, but when you call a lender, you get a substantially higher quote.

Your lender’s not pulling a fast one on you. Your mortgage rate may really be higher than what Freddie Mac reports — particularly if you’re using a conventional home loan to purchase your new home.

The bump to your mortgage rate results from of a government-mandated, rate-altering program based on something called “risk-based pricing”.

More formally, it’s known as the loan-level pricing adjustment (LLPA) program.

Risk Factors That Lead To Loan-Level Pricing Adjustments

The loan-level pricing adjustment system contains more than a dozen “risk characteristics”. Nearly all conventional mortgage borrowers are affected by at least one.

LLPAs are cumulative, too. If you trigger 4 adjustments, you’re required to pay all four.

Loan traits that affect your loan-level pricing adjustment include the following:

• Buying a home as an investment property
• Purchasing a condo with less than 25% equity
• Mortgaging a multi-unit home (i.e. 2-unit, 3-unit, 4-unit)
• Doing a cash-out refinance at any loan-to-value
• Subordinating a second mortgage via a piggyback loan

There are only a few scenarios which avoid loan-level pricing adjustments altogether. One such scenario is when a borrower with a credit score over 760 purchases a single-family, detached home (or a PUD) with a downpayment of 40% or more with no subordinate financing.

Everyone else is subject to LLPAs.

Home Loans Excluded from Loan-Level Pricing Adjustments

Loan-level pricing adjustments are neither discretionary fees nor “profit” to a bank. They are fees assessed by Fannie Mae and Freddie Mac, and there’s a way to skip them.

However, if your LLPAs become too large, you may find it smarter to use non-conventional financing for your next mortgage loan.

Loan-level pricing adjustments only apply to Fannie Mae and Freddie Mac loans. Current rules exclude all FHA, VA, USDA, and HUD Section 184 mortgages.

Therefore, if you’re purchasing a home with two units or more, or if your credit score is below 700, you’ll likely find it more cost-effective to purchase a home using an FHA mortgage instead of a conventional one — especially if you plan to make a low down payment.

Or, if you can qualify for a VA mortgage based on experience in the military; or, a USDA loan because you’re purchasing in a less-densely populated part of the country, it’s best to explore those options, too.

About the time to ignore the effect of loan-level pricing adjustments on your loan is when you’re using special conventional mortgage programs such as the HomeReady mortgage, which puts a cap on the amount of LLPAs a borrower can accumulate and allows for just 3% down.

HomeReady is terrific for home buyers in low-income areas and buyers who rely on income from boarders to help make ends meet each month.

Shop Around to Find Your Best Interest Rate

Mortgage lenders personalize your interest rates based on your credit history and other details about your financial situation. So you won’t know your rate options until you apply and get pre-approved.

To get a competitive quote, get personalized quotes from a few different lenders and compare them. This will show you the range of interest rates you’re eligible for and help you pick the most suitable lender.