Conforming mortgage rates may be posting all-time lows this week, but that doesn’t mean you’ll be eligible for them. You may have already called your loan officer and found this out the hard way.
It’s because of a federally mandated mortgage-pricing scheme known as loan-level pricing adjustments (LLPAs).
What Are Loan-Level Pricing Adjustments?
In effect since April 2009, loan-level pricing adjustments are changes to a loan’s base rate and/or fee structure based on that loan’s inherent risk to Wall Street.
It’s similar to auto insurance pricing. A sports car will cost more to insure than a comparably priced minivan — more risk, more cost.
In mortgage lending, loan risk can be loosely grouped into five categories. Mortgage applications featuring any of the five traits are subject to price adjustments:
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Credit Score – e.g. borrower’s FICO is below 740
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Property Type – e.g. the home is a multi-unit property
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Occupancy – e.g. the home is used as an investment
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Structure – e.g. there is a subordinate/junior lien
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Equity – e.g. mortgage insurance is required
Cumulative Risk Means Cumulative Cost
LLPAs are cumulative. A 3-unit investment property, for example, will face larger adjustments than an owner-occupied 3-unit home.
It’s these layered adjustments that explain why you may not be eligible for the rates you see advertised online and in newspapers — your particular loan may be subject to risk-based pricing that raises your mortgage rate and closing costs.
Want To Know What Affects Your Rate?
The government’s loan-level pricing adjustment schedule is public information. See what your lender sees and how your loan quote is calculated by reviewing the Fannie Mae LLPA matrix.
If you find the charts confusing, just call or email your loan officer for help with interpretation.
