The Bottom Line Up Front:
Keep paying your credit card bill! You will ABSOLUTELY NOT receive a more favorable borrowing rate with a lower credit score. At the end of the day, a borrower with a higher credit score will always get a better rate than a borrower with a lower credit score—this change simply narrowed the gap between the costs for those with a higher score and those with a lower score.
What is the “Loan Level Pricing Adjustment” and why all the buzz?
Loan Level Pricing Adjustments (LLPA) are additional fees assessed by lenders to mortgage borrowers for conventional mortgages, based on varying borrower risk factors. These factors include credit scores, loan size, loan-to-value ratios, etc. and fees are typically accounted for by lenders with higher interest rates. For borrowers, this means that the “riskier” you are to the lender, the more it will cost to secure your mortgage. LLPAs have been in effect since 2008 to mitigate lenders’ risk in the wake of the financial risk at the time. Most notably, recent changes to the LLPA have caused quite a stir for prospective and current homeowners, as after May 1, borrowers with lower credit scores will now have decreased costs, while borrowers with higher credit scores will now have higher costs than what they were.
Ultimately, these changes to the fee structure were objectively in favor of those with lower credit scores and at the expense of those with higher credit scores. But even with this current change, it is still advantageous for you to have a higher credit score as a mortgage borrower.
Why did they implement these changes?
The Federal Housing Finance Agency (FHFA) changed the structure of these LLPAs in an intentional effort to help improve housing affordability. The goal is to further incentivize those with lower credit scores and less money for down payments to purchase homes with lower borrowing costs.
How does this play out?
Let’s take a look at an actual example before and after the changes. If we assume two borrowers have an 80% loan-to-value ratio and a $300k mortgage, here is the LLPA cost breakdown:
As you can see, the difference from a 640 to a 740 credit score after this LLPA adjustment is only $4,125, compared to $7,500 before the adjustment, nearly half of what it used to be.
Even though this gap has narrowed, there is still no reason to tank your credit score for a shot at a better cost to borrow. It’s still advantageous for you to keep that credit score as high as possible, even with the new adjusted LLPAs!
And if you have any additional questions with respect to maximizing your real estate investment throughout the borrowing process, please let us know! We’re always happy to serve you however we can.