• 
  What Is It?
• How Do They Work
• Why Do They Exist?
• FHFA’s New 2023 LLPAs Ruling
• How They Impact Mortgage Borrowers
• Risk Factors Considered
• FAQs
• The Bottom Line

Loan-Level Price Adjustment (LLPA): What It Is, How It Works

Extra fees may apply to conventional mortgages

By 

Matt Ryan Webber

Updated November 02, 2024

Reviewed by 

Andy Smith

Fact checked by 

Suzanne Kvilhaug

What Is a Loan-Level Pricing Adjustment (LLPA)?

A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. If you have a conventional mortgage, the “price” of your loan is adjusted using LLPA. This might increase the amount you pay on your mortgage.1

LLPA applies to all conventional mortgages and is calculated by taking into account a range of risk factors.1 Essentially, these fees are a way for Fannie Mae and Freddie Mac—federally backed home mortgage companies—to reduce the risk they face in guaranteeing mortgages.

Key Takeaways

• A loan-level pricing adjustment (LLPA) is a fee with conventional mortgages.
• These fees are designed to reduce the level of risk exposure for Fannie Mae and Freddie Mac.
• LLPA fees are generally higher for riskier types of mortgages and for people with low credit scores or small down payments.
• Borrowers with high credit scores and large down payments typically pay lower LLPAs.

How Loan-Level Pricing Adjustments (LLPAs) Work

Every week, Freddie Mac publishes its Primary Mortgage Market Survey (PMMS). This report provides data on the average interest rates available to borrowers in the United States. You might find you are charged a different amount than the report figures. The difference between the quoted rate and what you actually pay is due to a government adjustment: LLPA.21

Essentially, LLPA is a way for federal loan companies to adjust the cost of mortgages to offset risk. In general, the idea is to make riskier loans more expensive without affecting the price of safer mortgages.

The government assesses the level of risk and calculates the LLPA by assessing more than a dozen factors. The most important of these are:

• Loan-to-value (LTV) and debt-to-income (DTI) ratios: Higher ratios often result in higher LLPAs.
• Credit score: A higher credit score results in a lower LLPA.
• Loan purpose: If you buy a property as an investment rather than as your primary home, you may have to pay higher LLPA fees.
• Occupancy: If a property isn’t occupied, you’ll face higher LLPA fees.
• Number of units: More units in a property results in higher LLPA fees.

Important

LLPA adjustments are cumulative. So, if your mortgage triggers four adjustments, you’ll have to pay all four. This could adjust the cost of your mortgage by 1% or more.1

Why Do Loan-Level Pricing Adjustments (LLPAs) Exist?

Loan-level pricing adjustments (LLPAs) were designed to solve a problem that became apparent during the financial crash of 2008. As millions of borrowers across the U.S. defaulted on their mortgages, Fannie Mae and Freddie Mac found they were badly exposed to risk and were losing money quickly.

To offset this risk, riskier borrowers are now charged more for their mortgages, and LLPA is the mechanism for doing this. Loan-level pricing adjustments impose fees on “risky” mortgages, but they are designed to leave the price of safer mortgages unaffected.

Note

LLPAs are not profits for your mortgage lender or fees to pay for a particular service. Instead, they are a government-mandated way of regulating risk in the mortgage market.3

FHFA’s New 2023 Loan-Level Pricing Adjustments (LLPAs) Ruling

The LLPA system remained largely similar from 2008 into 2023. In 2023, however, the Federal Housing Finance Agency (FHFA) put new rules in place that affect the LLPA structure.4

The purpose of these adjustments was to make housing more affordable. Accordingly, the FHFA reduced the impact of LLPA for borrowers with low credit scores and low down payments, and it increased the cost of LLPA for borrowers with high credit scores and high down payments.4

The new format affects conventional mortgages and refinance loans purchased by Fannie Mae and Freddie Mac. Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), and U.S. Department of Housing and Urban Development (HUD) Section 184 mortgages are excluded from these new LLPAs.

The impact on some borrowers could be significant. Under the new rules, someone with a $400,000 mortgage, a credit score of 740, and a 20% down payment saw an increase in fees from $2,000 to $3,500. A homebuyer with a lower credit score of 640 and a lower down payment of 3% saw a substantial decrease in fees: from $11,000 to $6,000.5

Tip

If you are affected by these changes, you might not see their impact immediately. Your mortgage lender might instead offer lower fees and effectively pay these costs for you. Nevertheless, the costs are still present, and you will eventually have to pay them over time in the form of higher interest rates.4

How Loan-Level Pricing Adjustments (LLPAs) Impact Mortgage Borrowers

Not all mortgages are affected by LLPAs. These fees only apply to conventional Fannie Mae and Freddie Mac loans. Current rules exclude all FHA, VA, USDA, and HUD Section 184 mortgages. If you have a low credit score, this could make an FHA loan a much more cost-effective option for you.3

If you have a conventional mortgage, however, the impact of LLPAs can be significant. For example, if you have a credit score of 659 and are borrowing 75% of your home’s value, then you’ll pay a fee equal to 1.5% of the loan balance. If you have a higher credit score (above 780), you won’t have to pay LLPA at all.

Risk Factors Considered in Loan-Level Pricing Adjustments (LLPAs)

Loan-level pricing adjustments are calculated by taking into account a range of risk factors. These are spelled out in Fannie Mae’s Loan-Level Price Adjustment Matrix.1

First, the type of mortgage is considered. Mortgages that are considered higher risk, such as adjustable-rate mortgages (ARMs) or mortgages with interest-only payments, may have higher LLPAs.3

Next, Fannie Mae takes into account your credit score. If you have a low credit score, you are considered higher risk and may be charged a higher LLPA. On the other hand, borrowers with higher credit scores will be charged a lower rate of LLPA. Sometimes, borrowers with very high credit scores (780 and above) can avoid LLPAs altogether.5

Finally, your loan-to-value (LTV) ratio is also used to assess risk. The LTV is the size of your mortgage loan divided by the appraised value of your property. The higher the LTV—that is, the bigger your loan compared to the value of your home—the higher your LLPA will be.1

Who Controls LLPAs?

Fannie Mae, a federally backed home mortgage company, controls the level of LLPAs and makes adjustments to fee levels frequently.1

What Is an AMI LLPA Waiver?

The area median income (AMI) waiver is designed to make mortgages more affordable for first-time borrowers by reducing the LLPAs that they must pay. It applies if any borrower on the loan is a first-time homebuyer and the total qualifying income of all borrowers is less than or equal to 100% of the applicable area median income limit for the subject property’s location or 120% area median income for properties in high-cost areas.6

What Is MIP Used for?

A mortgage insurance premium (MIP) is a type of mortgage insurance that is required of homeowners who take out loans backed by the Federal Housing Administration (FHA).7

What Are the 3 Types of Caps That Affect Adjustable-Rate Mortgages?

Adjustable-rate mortgages (ARMs) typically include several kinds of caps that control how your interest rate can adjust. There are three kinds of caps: the initial adjustment cap, the subsequent adjustment cap, and the lifetime adjustment cap.8

The Bottom Line

A loan-level pricing adjustment (LLPA) is a fee that is imposed on borrowers with conventional mortgages. These fees are designed to reduce the level of risk exposure for federally backed mortgage companies Fannie Mae and Freddie Mac.

LLPA fees are generally higher for riskier types of mortgages and for people with a low credit score or small down payment. Borrowers with high credit scores and large down payments typically pay lower LLPAs.

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