Loan Level Price Adjustments or "Why are people with bad credit getting better rates than me?"
Update: Before these changes went into effect they were delayed before utlimately being cancelled.
You may have heard about it in the news or on social media, but there are some changes to mortgages that went into effect on May 1st 2023. There are rumors and reports floating around stating that buyers with bad credit will get better interest rates than those with good credit. Fortunately this is not true.
Loan Level Price Adjustments
Loan Level Price Adjustments or LLPA's are fees that borrowers are charged when they get a mortgage. These fees are are based upon a number of things such as the borrowers credit score and how much their down payment is.
Essentially there is a charge for the interest rate you get. If you look at the chart, anyone putting down more than 40% will typically not be charged any fee, but as the down payment goes down the fee can be pretty insignificant if you have a over 780 credit score. If you have in the 600's that fee gets larger. Please note that this chart is based upon the new fees. So as you can see, someone putting 20% down and having an excellent credit score will pay 0.375% whereas if they had a middling credit score they would pay around 2.5%. So a better credit score will still get you a better rate and lower fees.
So what is all the hubbub about?
As of May 1st, the rates have changed. Really this has been in effect for while now because it goes for loans that close after May 1st so any contract done in April would be priced with this. The new rates caused high credit borrowers to have slightly higher fees, while borrowers with lower credit would have somewhat significantly cheaper fees.
As you can see from this chart, someone with a 780 credit score putting down 20% will be charged an additional 0.125% whereas with a credit score of 640 they will be charged 0.75% less than they would have been before. So overall, low credit borrowers will have a bit of relief, with a small change to high credit borrowers. Really the people in the mid 700's will have the biggest negative impact. But these rates fluctuate all the time so this is nothing new. For some reason it just went viral this time.
One thing to note is that this is solely for Fannie Mae and Freddie Mac. So FHA and VA borrowers have nothing to do with this at all.