What are Loan Level Price Adjustments (LLPAs) and Why Do They Matter?

There probably aren’t too many mortgage borrowers that are familiar with the term loan level price adjustments, or LLPAs. They’re sort of an invisible part of mortgage financing, but they directly impact the interest rate and fees on a mortgage loan.  If you’re a real estate investor, it’s important that you be familiar with LLPAs so that you can help position yourself to get the best mortgage financing value and maximize the ROI from your real estate investments. 

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What Are LLPAs?

First of all, when you hear the term “LLPA” or “loan level price adjustment”, it’s most likely in the context of Fannie Mae (FNMA) or Freddie Mac (FHLMC) financing, which is the predominant financing (FHA is common as well) offered today by traditional mortgage lenders and banks. If you’re planning to hold rental properties in your real estate portfolio, chances are you’ll finance the deals with Fannie Mae or Freddie Mac financing because it offers some of the lowest rates and longest terms available.

LLPAs are essentially charges for certain risk factors, such as low credit scores, high loan-to-value, investment property, etc., that are charged as a percentage of loan amount. Check out the chart below, which shows Fannie Mae LLPAs as of April 2011. If you look to the left side of the image under “Product Feature”, you’ll see a list of credit score ranges. Notice that there is a 0.000% LLPA hit for borrowers with a credit score of 740 and 95% LTV (I highlighted the LTV column), but for a <620 score, there is an LLPA hit of 3.000%.

Assuming all other qualifications are equivalent, this means that the borrower with a < 620 credit score will have to pay a charge of 3% of the loan amount to get the same interest rate as the borrower with a 740 credit score. On a $200,000 loan, for instance, the 3% charge equals $6,000.

Though LLPAs are expressed similarly to points (for instance 1 “point” is equal to 1% of the loan amount), they aren’t typically charged as fees. Instead, lenders usually charge a higher interest rate to cover the LLPA hits. For instance, if the 740 credit score borrower is offered a 5% interest rate with no points, the <620 credit score borrower might be offered a 5.75% interest rate with no points. Again, assuming all other things equivalent, the <620 borrower could buy down the rate to 5%, but he would need to cover the LLPA hit as part of his closing costs.

In reality, most borrowers don’t usually pay higher fees to cover LLPAs because most lenders wrap them into the base, or “par”, rate, so the end result is that LLPA hits usually equate to higher rates.

Why LLPAs Matter to the Real Estate Investor

The reason real estate investors need to understand LLPAs is because investment properties are considered to be riskier than owner occupied properties. Consider the chart below, which shows the Fannie Mae LLPA hits for investment property. Notice that the LLPA hit is 3.75% for a loan with an 85% loan-to-value (the loan amount equals 85% of the value of the property). This is in addition to any other applicable LLPA hits, including the credit score hits I showed you previously. When you add up several risk factors, it can equal some pretty large LLPA hits and a significantly higher interest rate.

The large LLPA hits for investment properties are the reason investment property loans usually have higher rates. Lenders understand that investment property loans are riskier than owner occupied financing, therefore they charge accordingly.

The Take Away

The biggest thing to take away from this is the importance of maintaining good credit scores and building equity into your deals to reduce your LLPA hits, which can cost you a lot of money over time and reduce ROI. If you acquire a property with hard money with a plan to refinance into permanent bank financing, make sure you have enough equity built into the deal that you can refinance at 70% LTV or better. If you are purchasing with bank financing, plan to put down 25% to 30% to get the best pricing.

Note that other LLPA hits can apply. Be sure to consult with a qualified mortgage professional for pricing specific to your particular situation and scenario.

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