The revamp of the loan-level price adjustment (LLPA) fee by Fannie Mae and Freddie Mac, the federally backed mortgage institutions overseen by the Federal Housing Finance Agency (FHFA), is being seen as one of the most confusing and questionable changes to mortgages. It is basically an attempt to help buyers with lower credit scores get a more reasonable loan. In reality, it is also penalizing those with higher credit scores and larger down payments.
The fees being changed are a mortgage surcharge by Fannie and Freddie, the rate of which is chiefly based on a homebuyer's credit score and the size of a down payment. They often are rolled into closing costs, which can be an overlooked factor by some people in buying their first home. LLPAs were introduced around the time of the 2008 financial crisis to help offset the risks borne by Fannie and Freddie Mac.
What has changed is that the spread of fees between high and low credit score borrowers won't be as great as previously. For instance, now a homebuyer with a credit score between 640 to 659 — considered "fair" — and who has a down payment of 5 percent will incur an LLPA of 1.5 percent. Prior to the change, the fee for this group of buyers was 2.75 percent. That means someone purchasing a $200,000 home would pay an LLPA fee of $3,000 under the new structure, down from $5,000 previously.
But some purchasers won't get as good deal as they did before. For instance, homebuyers with credit scores of 740 to 759 — considered "very good" — and putting 20 percent down will face a new LLPA of 1 percent, compared with 0.5 percent previously. For the purchase of a $200,000 home, that means the fee will double to $2,000.
Roughly 40 percent of borrowers don't use a federally backed mortgage so they won't be impacted but for everyone else this is something to consider. If you are interested in more details on this CBS news did a good job covering the subject.
