You have viewed Freddie Mac’s average Mortgage Rate Report. You also looked at Bankrate. You called your mortgage lender (or multiple lenders), but the mortgage rate quote you received was higher than what you can see online. Why?

You are likely to be quoted a higher rate than you see online. It is known as “risk-based pricing.”

It’s also known as the price adjustment for loan-level pricing (LLPA). They can apply for conventional loans, Fannie and Freddie.

Fannie Mae’s and Freddie Mac’s official definition of loan pricing is:

A loan-level pricing adjustment is a fee that’s assessed to conventional mortgage borrowers based on factors such as credit score, loan-to-value, loan-to-value, loan-to-value, loan-to-value, loan-to-value, loan-to-revenue (LTV), and the number of units in a house.

These loan traits can have an impact on your loan-level pricing adjustment:

  • Occupancy – investment properties or vacation homes cost more
  • Condos are riskier than single-family homes because they have multiple owners.
  • Units – Mortgaging multi-unit dwellings (i.e., 2-unit, 3-unit, 4-unit)
  • Cash-out refinances at any loan to value
  • A piggyback loan can be used to subordinate a second mortgage
  • Credit score – Higher, the better

Your mortgage rate will be higher if there are more risk factors. Economics 101.

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Your credit score heavily influences pricing for LLPAs. If you have credit scores in the 600-600 range or higher, you will be subject to significant LLPAs unless you owe less than 60% of the property’s value.

It is essential to maintain your credit score high – at least 740. It is where loan-level pricing adjustments do not affect your interest rates.

A borrower with a 741 FICO score will get the same interest rate as a borrower with a 794 FICO.

However, this is different for those with lower credit scores. A borrower with a credit score of 740+ might need to pay 3.5 percent more to get a mortgage.

It brings us to loan-to-value (LTV), the other major player in loan-level pricing adjustments.

A mortgage lender is less likely to approve a mortgage loan for a property with a 60 percent loan-to-value than a higher loan-to-value loan. Why? They will be able to sell the home and recoup their investment or maybe even make a profit if they have to foreclose.

Lenders generally lose if they need to foreclose on a fully-mortgaged home with loan-to-values above 90 percent.

Lenders have historically recouped around 80 percent of the property’s value after a foreclosure sale. It is expensive to maintain the home when it is vacant, as well as the legal costs associated with foreclosing.

The foreclosure process of where your property is located also plays into rates.

Rates in non-judicial states are usually lower than those in “judicial foreclosed” states. It is because foreclosure takes less time and is easier for lenders.

It is also essential to consider how the property is being used. Mortgage lenders are more likely to lend money to properties with an additional occupancy than the primary residence, such as a vacation home or investment property.

It’s not hard to see the point. Consider this: If you owned two homes, one your primary residence and the other your investment property, which would you give up first in case of trouble?

Tenants can also be unpredictable and cause damage to your home, making it difficult to rent again or sell the property without significant investment in renovations and repairs. What happens if you don’t have the money?

It is why rates for investment properties are often significantly higher than primary residences.

The loan-level adjustment for 25 percent (75 percent loan-to-value) is 2.125 percent. If you are only willing to deposit the minimum 15%, the LLPA rate is a staggering 4.125 percent.

Understanding the basics of risk-based pricing will help you to create a financial plan that allows you to qualify for the best rates.

You will need a 40% down payment and a credit score of 740+ to avoid loan pricing adjustments. You are taking a risk, which can lead to higher interest rates.