What are LLPA and how do they effect mortgage rates?

Lately I have received a few questions on LLPAs and I wanted to share some thoughts with you incase they come up with a client.

Loan Level Price Adjustments (LLPAs) are on all Fannie Mae and Freddie Mac loans. Based on LTV, Credit Score, Number of units, occupancy type, and Loan Type/Purpose.
Fannie and Freddie started these LLPAs some 6 years ago to add risk adjustments to their loans. The higher the risk on the loan the higher the LLPA maybe to mitigate that risk.

One question I get on a regular basis is why are the LLPA lower on 95LTV lower than an 80LTV loan?
Answer is that loans at an 95LTV have mortgage insurance. Mortgage insurance is insurance for the lender incase of default by the borrower.
LLPA
Example
95LTV loan
5% down payment
MI 30% Coverage
=
Lender’s Risk is up to 65% of the original PP
————————————————
80LTV loan
20% down payment
=
Lender’s risk is up to 80% of the original PP
————————————————-
SIDE NOTE:- this is why the LLPA are higher on a piggy back 2nd lien. This is an adjustment to the MI covered loan that has a 2nd lien instead.
MAKE SENSE???
John E. McClellan
Branch Manager
NMLS #207768
Supreme Lending

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