Morning! This is MF Lending - today I have a unique edition for you. Instead of providing you with three news stories from over the weekend - I have one big one.

You have probably seen the topic on the news or social media and I thought it would be most beneficial for the readers to understand what is happening outside of media headlines.

Here’s what we’ve got for you today:

Why Your Lending Partner Is More Important Than Ever 🤝

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Nuwave Rates Today -

Your Lending Partner Is More Important Than Ever 🤝

The fees for new mortgages in the US will change on May 1st.

Why?

The Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac have been modified.

Simply put, LLPAs are how a borrower’s mortgage is priced by banks and lenders. LLPAs are “why” two different borrowers could have two different interest rates on the same property.

Here is a screenshot of the new LLPA grid for a conventional purchase - please note these represent the price adjustments of the loan, not the actual interest rate.

The X-axis represents the LTVs of the loan. An 80% LTV means 20% down payment.

The Y-axis represents the credit score for the borrower.

As an example, let’s say the “market rate” (rate with no adjustments) is 6%. If you are a borrower who has a 765 credit score and putting 10% down (90% LTV), your LLPA would be .500%.

What does that mean?

If this borrower wanted the 6% “market rate”, they would need to pay .5% of the loan amount in discount points to get that rate. Alternatively, the mortgage company could roll the .5% into the loan and the client could have no discount points and a rate of 6.25%.

If you have a client purchasing a 500k home with 10% down - .5% = $2,250

Ok, so what changed?

Here is a heat map to look at these changes in detail. This shows the change in LLPA pricing that goes into effect May 1.

Here are some key (and wild!) highlights:

• Reduction in the effective penalty for credit scores under 680

• Addition of 760-779 tier & 780+ Tier (previously top tier was 740+)

• Penalty for higher credit scores with 20% down has increased in most cases

• Lower credit score borrowers with large down payments are getting huge boots

  • ie - people who are selling an existing home and moving into a new one.

The last major change is the addition of a DTI (debt-to income) LLPA - which has never happened before.

Why does this matter?

1. income calculations can be subjective (for variable income jobs like commission, overtime, tips, etc.).

2. Debt calculations can be legitimately "tweaked" with some advanced planning and/or debt consolidation.

   • As an example - you can go pay off credit card debt, consolidate student loans, sell your car, etc.

Other notable changes:

• Several changes to 2-4 unit property LLPAs

• A new generic LLPA for "subordinate financing" (a 2nd loan or HELOC)

• Big increases in fees for many "Cash-Out" refinance loans.

These changes will apply to most loans in the US. The new fees will increase closing costs for borrowers with mid-tier credit and 20% down payments, while others may face higher interest rates. With these new LLPAs - the worst thing you can advise your clients to do is put 20% down. Either put down 25% or 5-10%.

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So what’s the point?

The point is this - you need to be sure you are working with a lender who understands these LLPA changes and cares enough about your clients to educate them on how to get the best deal on their mortgage.

If you are working with a lender who merely plugs in a borrower’s information, tells them the rate, and says take it or leave it - they are leaving money on the table.

Simple things like the following can save borrowers, literally, thousands of dollars at the closing table:

1. Putting less down & recasting in the future (see “recasting below”)

2. Paying off credit cards to increase credit score quickly

3. Adjusting where to apply proceeds from a property sale

4. Putting 25% down instead of 20% down

This is no longer a plug-and-play business. It takes someone who focuses on their craft and cares about their client, to get the best rates in the market.

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A mortgage tool you may have never heard of:

Recasting.

"Recasting" is the process of making a one-time payment towards the principal balance of the loan, which then leads to the lender adjusting the monthly payments accordingly.

In other words, if you have a mortgage loan with a fixed interest rate and you make a large payment towards the principal balance, you can ask your lender to recast the loan. This means that the lender will re-amortize the loan based on the new, lower principal balance, and adjust your monthly payments accordingly.

I expect these will become much more popular throughout the next few years. Especially if rates come down and sellers decide to sell their homes with large amounts of equity in them.

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Here are some more examples:

Let’s say you have a client with a 725 FICO and putting 20% down (as good ‘ol Dave Ramsey taught us…).

This client’s LLPA is - 1.25%

How can we reduce this:

1. Look at their credit card balances -

   One of the biggest reasons why people have lower credit scores is their utilization rate - this is the ratio between their balance and their credit limits. If you can pay off one or two credit cards to improve your credit score, you could reduce your LLPAs

2. Put less down and “recast” -

   Putting less down can actually solve this borrower’s problem with the new LLPAs. Instead of putting 20% down - if this client put down 5% their LLPA would be .75% (that’s a .5% difference).

   On top of that, if they used the other 15% to pay off their credit cards as well, they could potentially improve their credit score to 740 - reducing their LLPA to .5%.

If you did this strategy - you could save your client .75% in LLPAs. On a $500,000 loan that is $3,750 in loan costs that are absolutely not needed.

Alternatively, the client could choose to use the funds they were going to put 20% with and include them in a large monthly payment in month 1. They can ask the mortgage company to recast the loan. This recalculates the payment, removes the MI, and you would have the benefit of the lower LLPAs at closing.

TLDR

Pricing for mortgages is changing on May 1.

It is negatively affecting borrowers with mid-tier credit and 20% down more than anyone.

It can be avoided if you work with lenders that understand the changes and how to work around them.

Work with a lender who works hard for your clients to get the best deal - and cares enough to advise them accordingly.

The Cul-de-Sac

Mark your GCal 📆

1. Tue Apr 24th - Nashville Council public hearing & vote for new Titans Stadium

2. May 1 - LLPA changes go into affect

I hoped you all enjoyed this format. Let me know in the comments what you thought!

Thanks for reading - that is all we have for today 😎

Please forward this to your friends and colleagues if you found it valuable.

— Michael F DiLucchio