If you’re thinking about purchasing a home this year, there are recent changes to loan level pricing adjustments (LLPAs) that you may want to know about. These are changes to mortgage costs that were imposed by government agencies Fannie Mae and Freddie Mac and announced by the Federal Housing Finance Agency (FHFA) in early 2023. These changes went into effect as of May 1, 2023 and may impact borrowers whose loans are guaranteed by one of the enterprises (which is most mortgages in the nation). Here’s what to expect:
The Biggest Changes to Mortgage Costs
The revisions to LLPAs can be considered either better or worse, depending upon your perspective and circumstances. Before I jump into the details, let’s quickly define LLPA. A loan level pricing adjustment is a fee that borrowers pay on conventional or conforming mortgages that are backed by the government enterprises. LLPAs are another layer of protection for the agencies, and higher fees are charged on loans that are deemed riskier. LLPAs are calculated on factors including the borrower’s credit score, loan-to-value ratio, and type of loan product.
Now to dive into the changes. For many borrowers with lower credit scores (below 680), fees have become less expensive. Here’s an example: a borrower with a credit score of 659 who is borrowing 75% of the home’s value will pay a fee of 1.5% of the loan’s value at closing. This is a significant decrease from the previous fee of 2.75%. However, there is a new charge that factors in the debt-to-income ratio. Those with a debt-to-income ratio above 40% who are borrowing more than 60% of the home’s value will now be required to pay additional fees.
If you plan to purchase a home with a conventional or conforming mortgage, the changes to the fee matrices will impact you. However, if you’re planning to buy a luxury home in Boulder, it’s likely that these revisions won’t have any effect on your closing costs. The conforming loan limit in Boulder County is $856,750. Because our market is so strong and supply is limited, it’s very challenging to find a home in Boulder at this price point. For this reason, buyers seeking financing for a home will often need to go with a jumbo loan. Although high-balance loans may be purchased by Fannie Mae or Freddie Mac, jumbo loans are not eligible to be guaranteed by the GSEs. Regardless of when or how you plan to buy, there’s no harm in staying up to date on the latest policy changes. If you’re planning to purchase in Boulder, please don’t hesitate to contact me when you’re ready to start the process.
Contribution by Nick Solis, Artisan Lending