On May 1, 2023, new loan-level price adjustments (“LLPAs”) for single-family mortgages purchased by Fannie Mae and Freddie Mac (the “agencies”) went into effect. The Federal Housing Finance Agency (“FHFA”) – the independent federal agency that regulates the agencies and the eleven Federal Home Loan Banks – first announced these changes to the LLPAs in October 2022. However, in recent weeks, the changes to the LLPA fee schedule have attracted considerable attention in the media as the spread between the fees paid by borrowers with lower credit scores and those with higher credit scores has been narrowed.
LLPAs, first introduced by FHFA in 2008, are fees charged by lenders to borrowers as compensation for the risks associated with making a conventional loan. LLPAs are determined by several factors, including the borrower’s credit score, the loan-to-value ratio, the occupancy type, and the number of units at the property. Consistent with the prior LLPA fee schedule, the fees charged under the new LLPA schedule generally increase as the borrower’s credit score decreases (regardless of the size of the down payment made). While the new LLPA fee schedule will result in some borrowers with good credit scores paying larger fees than they would have paid under the prior fee schedule, the updated LLPA fee schedule does not represent a pure fee decrease for high-risk borrowers or a pure fee increase for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat. According to FHFA, the updated fees associated with a borrower’s credit score and down payment will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.
In comparing the prior LLPA fee schedule with the new LLPA fee schedule for purchase money loans, a borrower with a credit score of 675 who is borrowing 80% of the home’s value will pay a fee of 1.875% of the loan balance under the new fee schedule, as opposed to a fee of 2.75% of the loan balance under the old fee schedule. On a $200,000 loan, the borrower will save $1,750 under the new LLPA fee schedule.
A borrower with a credit score of 780 (or higher) who is borrowing 80% of the home’s value will pay a fee of 0.375% of the loan balance under the new fee schedule, as opposed to a fee of 0.5% of the loan balance under the old fee schedule. On that same hypothetical $200,000 loan, the borrower will save $250 under the new LLPA fee schedule.
Although the borrower with the higher credit score is still seeing a fee reduction under the new LLPA fee schedule, the fee reduction is not as steep as the reduction received by the borrower with the lower credit score in the above example. On the contrary, a borrower with a credit score of 725 who is borrowing 80% of the home’s value will pay a fee of 1.25% of the loan balance under the new fee schedule, as opposed to a fee of 0.75% of the loan balance under the old fee schedule. On a $200,000 loan, the upfront fee paid by the borrower will increase by $1,000 under the new fee schedule. Although the fee paid by the borrower with the credit score of 725 will be increasing from $1,500 to $2,500 under the new fee schedule, the increased fee is still significantly less than the $3,750 fee to be paid by the borrower with a credit score of 675 under the new fee schedule. By comparison, the borrower with a credit score of 780 (or higher) will only pay a fee of $750 under the new LLPA fee schedule.
The updates to the LLPA fee schedule took effect for mortgage loans delivered to the agencies on or after May 1, 2023. An additional LLPA fee based on debt-to-income ratio that was originally included in this fee update was rescinded on May 10, 2023 after FHFA received feedback from the mortgage industry and other market participants about the challenges of implementing a fee based on a borrower’s debt-to-income ratio. Since mortgages are sent to the agencies after the loan closing, lenders began factoring the updated LLPA fees into mortgage applications several months ago.
The updated fees only impact home buyers obtaining conventional mortgages backed by the agencies and do not have any retroactive impact on people who already have a mortgage on their home or who own their home outright. While these changes will apply to a majority of the home loans within the United States, there are some loans, such as FHA loans, VA loans, and jumbo loans, that will be exempt from these changes. Although they are considered upfront fees, LLPA fees do not necessarily come out of the borrower’s pocket at closing, as lenders can offer higher interest rates in some cases to pay these costs on behalf of the borrower; provided, however, the borrower is still paying these fees over time in the form of a higher interest rate rather than an upfront fee.
If you’re a homebuyer navigating the changes to the LLPAs, you’ll want to explore more mortgage options with your lender than you probably would have in the past to ensure you find the best rate with the lowest fees.
If you have questions about this subject or related matters, please reach out to attorney Michael A. Discenza at (212) 912-3605 and firstname.lastname@example.org, or the Harris Beach attorney with whom you most frequently work.
This alert is not a substitute for advice of counsel on specific legal issues.
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