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.

LLPA applies to all conventional mortgages and is calculated by taking into account a range of risk factors. 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.

How Are Loan-Level Pricing Adjustments (LLPAs) Calculated?

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 compared to the report figures. The difference between the quoted rate and what you actually pay is due to a government adjustment: LLPA.

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 a 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.

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.

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.

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.

Loans affected by the new format will include 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 will see 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% will see a substantial decrease in fees: from $11,000 to $6,000.

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.

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.

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.

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.

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.

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.