While researching mortgages - or maybe reading an article here on determining interest rates - you may have come across a term called “LLPAs”, or “loan level price adjustments”. These are adjustments based on your credit profile to the interest rate that you qualify for. There are many different types of LLPAs, ranging from your credit score, to the property type you are trying to finance, to the loan-to-value / LTV you are looking to borrow.
For a refresher, LTV is calculated by the loan amount divided by the property’s value (a $1,000,000 appraised value and a $500,000 loan amount would be considered a 50% LTV). Typically, will not see LLPAs adjusting rates for LTVs below 60%.
Some instances that you will almost always see adjustments are in cash out refinances, multiple unit properties (2-unit, or 3-4 unit), and condominiums if you are at a 75% LTV or higher.
In addition to LLPAs based on LTV, you might also see them from a combined loan-to value pricing adjustment. For instance, if, on the $500k loan amount and the $1,000,000 appraised value (assuming a $500k first mortgage, there was a $300k second mortgage that we were looking to subordinate), you would take a loan level pricing adjustment to an 80% LTV. That is called the combined loan-to-value or “CLTV”. More often than not, when dealing with Fannie Mae or Freddie Mac guidelines, LLPAs will be steeper and more expensive the lower your credit score is, and the higher the LTV: an LTV of 80% and a credit score of 650 is going to bring fairly steep rate adjustments. LLPAs are cumulative, meaning there are pricing adjustments for each situation. If you have a low credit score, a high LTV, a 3-unit property and are taking cash out, you are going to take a substantial hit above a best-execution rate...
Some best-execution rates, courtesy of Prospect Financial emails!
A “best-execution rate” is essentially the best mortgage rate available in the current market; this rate will not come with any LLPAs. To compare apples to apples on that $500k loan amount (with a best-execution rate at a hypothetical 3.625%), let’s say you have a 60% LTV or below, a 740 FICO or above, and a single family residence. Contrast that with a 650 FICO and an 80% LTV, you are going to be looking at a difference of 3 points: this means you won’t get that 3.625% as is! The best-execution rate with 0 points will now come with 3 points, or $15,000 in closing costs. As you can see, LLPAs can get very steep as adjustments accumulate.
Some LLPAs are unavoidable, and shouldn’t necessarily be looked at as derogatory or negative. For example, if you buy a duplex, you’ve likely made the choice to buy that duplex for good reason, so your rate will be expectedly higher. The same is true for an investment property: you will almost always pay a slightly higher rate for investment properties vs. a primary residence. Again, this doesn’t necessarily mean that the investment property is a “bad investment”, it’s just different, and investors will treat it as such. There are, of course, those other LLPAs that can be avoided, like low credit score, high LTV, cash out scenarios, etc.
To review, the primary types of loan level pricing adjustments will stem from property use (ex. primary residence, second home, investment property), number of units (single family residence, condo, duplex, multi-unit), along with the type of financing it is: whether it’s a rate and term refinance, a cash-out refinance (typically $2,000 or more), or a home purchase. Other LLPAs will be applied based on credit score and LTV. A knowledgeable loan officer will be able to help steer you through this process, and guide expectations of what LLPAs to expect from your financial situation. You’ll want to know what LLPAs might pop up from, for example, an appraisal coming back higher or lower than anticipated and/or your credit score coming in higher or lower than anticipated. As always, you’ll want to make sure that whoever you choose for your loan officer is well versed in structuring your loan to make sure they have your best interests at heart.
To check rates any time without speaking to a loan officer, feel free to check out our live quote generator.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707
Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.
"I've had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership."
We've been helping customers afford the home of their dreams for many years and we love what we do.
Company NMLS: 365482
948 Garnet Ave
San Diego, California 92109
Phone: (858) 605-0952