Sponsored Content from CreditXpert: The Hidden Revenue Growth Tool: Credit Score Improvement and Loan Level Price Adjustments

What are Loan Level Price Adjustments?

Mike Darne

Loan Level Price Adjustments (LLPAs) were introduced by Freddie Mac and Fannie Mae almost 15 years ago. They have been around so long they are de rigueur; all mortgage lenders factor LLPAs into mortgage rates every day. LLPAs are fees charged by lenders to borrowers to compensate for risks associated with the loan. These fees vary based on factors such as credit score, loan-to-value ratio, and property type. The purpose of LLPAs is to ensure that the Agencies are appropriately compensated for the risks associated with the loan.

Think about loan level price adjustments as you would insurance premiums, say, on your car.  Riskier drivers pay higher premiums; safer drivers pay lower premiums. So it is with mortgage loans. Fannie Mae and Freddie Mac collect LLPA premiums based on every individual loan’s characteristics. The higher the risk, the higher the LLPA premium. It’s really that straightforward.

And while Loan Level Price Adjustments are ‘set in stone’ based on a particular loan’s characteristics, there is one characteristic that borrowers and lenders can improve during the mortgage process, and, therefore, reduce the LLPA on that particular loan. That characteristic: the credit score.

What do we know about credit score improvement?

First, more than two-thirds of all borrowers across all credit bands can improve their credit score by at least one 20-point credit score band within 30 days. We know this because we have analyzed nearly one billion credit inquiries over the past two decades.

The second thing we know is that more than 65% of borrowers WERE NOT offered the opportunity to improve their credit score during the mortgage process. This came through loud and clear during research that CreditXpert conducted in December of 2022 with recent mortgage borrowers and prospective home buyers. 

The third thing we know from our recently completed consumer research is that 70% of the borrowers who can improve their credit score will take the actions necessary to do so. They will do this because they believe it helps them achieve better home financing options: lower rates and fees, more and different loan programs.

What are the other loan characteristics used in the ‘insurance premium calculation’?

The other primary loan characteristics are used to calculate the ‘insurance premium’ is loan-to-value (LTV).  In addition to Credit Score and LTV, other loan characteristics like number of units, second or investment homes and type of property may impact LLPA premiums. The important thing to note here is that LLPAs are cumulative. A single loan could have multiple characteristics that figure into the LLPA for that loan.
The credit score stands alone in that it can, unlike all other LLPA characteristics, be improved during the mortgage process. Making sure borrowers are aware of the opportunity to improve their credit score, and that they take the actions necessary to do so, means a lower LLPA premium on their loan.

How much lower? Studying the main credit score / LTV table reveals, generally, a 25-basis point decrease in premium for a 20-point increase in credit score. On a loan of $380,000 with an 80% LTV a borrower that moves from a 680-credit score to a 700 could save $1,425 in LLPA premiums. When you multiply savings like these across a portfolio of loans, things really start to add up!

We call this revenue strategy a hidden winner because it’s been hiding under the bright cover of daylight since the dawn of Loan Level Price Adjustments. It works right now, when lenders need it most; enhancing revenue has never been more important. 

We know that a Credit First strategy, where credit score improvement is offered to every eligible borrower, is a true hidden winner, one that will enhance every lender’s bottom line as well as help offer borrowers a better, more competitive rate.  The math is simple.  So is credit score improvement thanks to CreditXpert’s time-tested, data-centric approach.

Learn more about CreditXpert’s Enterprise Platform: https://creditxpert.com/enterprise/. See our most recent research and publications: https://creditxpert.com/credit-insights/.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)