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Simple Real Estate Definitions : Loan-Level Pricing Adjustments
Loan-level pricing adjustments are mandatory loan fees based on a borrower’s specific default risk.
First introduced in 2008, LLPAs were Fannie Mae’s and Freddie Mac’s logical response to massive balance sheet losses. At the time, the housing market was deteriorating and mortgage delinquencies were rising.
To “better align with loan risk characteristics”, the two entities created specific fees to be associated to specific loan traits, to be charged to all borrowers.
LLPAs are still in existence today.
Today’s loan-level pricing adjustments can be grouped into 5 basic categories. Application exhibiting any of the 5 traits can trigger LLPAs, adding to a borrower’s loan fees:
- Credit Score (i.e. the borrower’s FICO is below 740)
- Property Type (i.e. the subject property is multi-unit)
- Occupancy (i.e. the subject property is an investment home)
- Structure (i.e. there is a subordinate/junior lien on title)
- Equity (i.e. mortgage insurance is required by the lender)
In many respects, loan-level pricing adjustment are similar to auto insurance. All things equal, the driver of a “fast” car will pay higher costs than the driver of a “safe” car. The same is true for mortgages.
Loan-level pricing adjustments are public information. Fannie Mae publishes the complete LLPA matrix on its website. The chart can be confusing, however. If you have questions about how LLPAs work, talk with your loan officer.
Better Credit Scores Get Better Mortgage Rates
This week marks the start of the Refi Boom’s 7th month across Georgia ; rates have been falling since early-April 2010. Whether you’re looking to refinance or buy a home, however, know that not everyone will qualify for today’s low rates.
Mortgage approvals are primarily based on good income, good equity and strong credit, and, without all three, the best rates of the day remain out of reach. Now, you can’t always ask for a raise and equity is a function of the housing market, but you can do something about your credit score.
In this 4-minute segment from NBC’s The Today Show, you learn some credit basics to help propel your score higher:
- There’s no “quick fix” for credit. Time + Good Credit Behavior = Better FICOs.
- Pay every bill when it comes due. Even one late payment can damage your score.
- Don’t close old credit cards
Also among the segment’s advice is to stop worrying about whether rates have bottomed. Refinance today if it makes financial sense. Then, if, by chance, rates fall in the future, just refinance again. Don’t be greedy, we’re told.
Fannie Mae's New Loan Quality Initiative
A new loan quality initiative from Fannie Mae is making it harder for Blairsville Home Buyers and refinancing homeowners everywhere to close on a mortgage.
Beginning June 1, 2010, with all new applications, Fannie Mae wants lenders to verify that borrowers have not taken on new debt during the underwriting phase of the mortgage.
If new debts are found, the mortgage is subject to a re-underwrite and a possible turn down.
For Fannie Mae, the goal is to reduce the number of loans that go bad because of new, non-disclosed debt. Lenders have the freedom to verify in whatever manner they wish, but in most cases, the verification process will amount to a credit re-pull made just prior to closing.
The underwriters will be looking for 3 things in particular — even after your loan is approved.
First, your updated credit report will show your current credit card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold, your loan will be denied.
Second, underwriters will be looking at your updated credit score. If your FICO has dropped below minimum lending standards, your loan will be denied. Or, you may be subject to a new loan-level pricing adjustment.
Loan level pricing adjustments are mandatory loan fee based on your credit score.
And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you’ve been applying for credit elsewhere. Underwriters can use this information at their discretion.
Fannie Mae’s Loan Quality Initiative is just one more way that the government-backed group is trying to improve its loan pools. Unfortunately, it’ll mean more turndowns for mortgage applicants.
Therefore, take extra care of your credit between the time of application and the time of closing. Don’t buy new cars, don’t buy new appliances, and — most definitely — don’t open new credit cards. Be extra safe with your credit because a mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour.
When in doubt, talk to your loan officer about what may or may not trigger the Loan Quality Initiative. Your loan approval is at stake.
1 In 8 Banks Tightened Prime Mortgage Standards
The Federal Reserve says that financial markets “remain supportive of economic growth“. Residential mortgage guidelines, however, continue to tighten.
If you’ve applied for a home loan recently, you probably felt it; extra scrutiny on income, assets and credit scores, among other things. The hard proof of the changes, however, can be found in the Federal Reserve’s quarterly survey of its member banks.
Every 3 months, the Federal Reserve asks senior bank loan officers around the country whether their respective banks’ “prime” residential mortgage guidelines tightened since the last survey.
For the period January-March 2010, 1 in 8 banks surveyed toughened their qualification standards.
Only 4% loosened them.
When we account for the Fed’s survey in conjunction with new underwriting standards from Fannie Mae and FHA, it’s clear that getting approved for a mortgage in 2010 is more difficult than at any time in recent memory.
Today’s homeowners and home buyers in Blairsville have taller hurdles to leap:
- Minimum FICO scores are higher
- Down payment/equity requirements are larger
- Debt-to-Income thresholds are smaller
In other words, mortgage rates may stay low throughout 2010, but that won’t matter to homeowners failing to meet the new, minimum eligibility standards as set forth by the lenders.
If you’re among the many people wondering if now is the right time to buy or refinance a home, remember that — along with a probable increase in mortgage rates — mortgage approvals are getting more scarce.
The best home price or mortgage rate in the world won’t matter if you’re ineligible for financing.
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7 Ways To Protect Your Credit Score For Better Mortgage Rates
As mortgage lenders tighten approval standards in Georgia and nationwide, the importance of a good credit score is rising. Credit scores not only make the difference between a mortgage approval and mortgage turn-down, but they also play a large role in determining your actual mortgage note rate.
In the 3-minute piece, the NBC Today Show talks about 7 ways that homebuyers ruin their credit — often by accident. Some of the highlighted mistakes include:
- Closing open credit cards
- Making appliance buys on credit prior to closing
- Asking creditors to lower credit balances prior to closing
In general, a 740 FICO will insulate a borrower from the higher costs and/or rates associated with low credit scores. Below 740, though, every 20 points adds to the damage. Watch the video and apply what you can to your own situation. The more you know, the more you can save.
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Tough Changes To The FHA Refinancing Guidelines
Beginning November 17, 2009, the FHA will make it harder to qualify for its popular Streamline Refinance program.
Available exclusively to homeowners with existing FHA home loans, the streamline program is meant to help homeowners reduce mortgage payments as simply as possible.
As such, the program carries minimum eligibility requirements.
In fact, the FHA Streamline Refinance is more notable for what it doesn’t require from applicants.
- There’s no income verification
- There’s no asset verification
- There’s no employment verification
- There’s no appraisal required
The two biggest qualifiers, really, are that the homeowner meets a minimum credit score and that the new loan doesn’t exceed the original balance of the old loan.
The new program guidelines, however, are much stricter.
Effective next month, among other requirements, applicants must show evidence of employment and income, plus proof of cash required at closing.
Furthermore, homeowners can’t finance closing costs into the mortgage without a complete home appraisal. In areas of declining value, this may render refinancing with the FHA impossible.
Therefore, if you’re a homeowner with an FHA mortgage, consider contacting your loan officer before the November 17 deadline to explore your Streamline Refinance options. Mortgage rates are low and you never know for what you’ll qualify.
The worst thing you can do is to wait too long to find out. Once the deadline passes, the old guidelines will be history.
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