We’ve been getting a lot of questions about the new LLPA (loan level price adjustment) for Conforming loans and if people with worse credit will really get better rates than borrowers with excellent credit. The short answer is NO, and your clients should never intentionally damage their credit. Surprise, surprise, there’s some entirely incorrect information circulating that your clients may be exposed to. Below is an explanation and FAQ’s:
What is changing?
Fannie May & Freddie Mac base pricing adjustments for credit scores & down payment are changing. Borrowers with a lower credit score & lower down payment will not be as heavily penalized. And, borrowers with best case scenario credit scores & down payment will receive less of a benefit than before. So, the difference in rates between best case credit profile vs. lower credit score will be less significant. These changes apply to every conforming loan funded by each & every mortgage company.
Does this mean borrowers with lower credit scores get better terms than those with higher credit score?
No. People will still be in better position with a better credit & more down payment. The difference between excellent & lower credit tiers will be less significant.
When does this go into effect?:
It’s been priced into rates for over a month now. The May 1st date is when these adjustments go into effect for the mortgages purchased on the secondary market by Fannie/Freddie. Banks knew this was coming, so these changes have already priced in and borrowers will not see any changes to rates over the next week, outside of the normal day to day bond/rate fluctuations.
What is the FHFA trying to achieve with these pricing adjustment?
We all know Fannie/Freddie’s mission to increase access to affordable housing. It’s always been their mission and it’s been a priority for the director of FHFA. The new director of the FHFA has been vocal in disapproval of the solutions provided by Franny and Freddie and she thinks more is required of them to increase access to affordable housing, and she thinks this will help increase access to affordable housing.
Is this a good idea and will it work?: We don’t like it but the whole world has to deal with it, so it is what it is at this point. We do not see these pricing changes moving the needle in making homeownership more attainable for more Americans because even after these changes a borrower with low 600’s credit score is still better off going with an FHA loan, and those who have done a great job managing credit are stuck a hair worse pricing. A better idea would be a campaign to educate people on how to manager credit; it’s not complicated and the information could be shared on something as simple as this one page I put together and have been sharing with clients for over a decade (see attached). WE (all of us on the real estate community) continue to be the front lines in educating the public on all things related to buying, investing, & enjoying real estate.
If you want to dig into the details, here are some example of scenarios that will be most affected: Attached is a matrix showing which scenarios have pricing improvements (green) vs. hits (red), relative to the old standard LLPA’s.
- LTV’s in the 80% – 85% range are most significantly affected, so more borrowers in the ~19.99% – ~15% down might consider just doing 10%.
- Cash-out refinances hits are mostly greater, unless you have top tier (>780) credit, or extremely low LTV (<30%). So, cash-out refi is actually a scenario where if credit is >780, pricing adjustments have improved.
- Price improvements for 2 & 3 unit properties.
- Price improvements for low LTV investment properties.
- Vacation Homes & Investment Properties essentially priced the same now.