High-Balance and 2nd Home Loans to Become More Expensive

Both Fannie Mae are Freddie Mac, the two agencies that purchase conforming loans, are going to charge additional fees thus making 2nd (vacation) homes and high-balance loans more expensive.

What is a 2nd home and High-Balance Loans?

Sometimes my borrowers confuse 2nd home as the home they buy after they have purchased their first home. That’s not the case.  A 2nd home is defined as a vacation home; a home that’s not rented out and is also not your primary residence.

High-balance loans are loans with loan amounts higher than the basic conforming limit of $647,200. For example, a lot of counties in California are considered high-cost counties and the conforming loan amounts can be as high as $970,800 for 1-unit properties.

How will these loans get more expensive?

Fannie and Freddie are adding Loan Level Price Adjustments (LLPAs) to these loans. LLPAs either increase the closing cost or increase the qualifying rate or a combination thereof.

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Let’s take a couple of examples from the LLPA grid below.

Example 1 – 2nd Home Loans

If you’re putting 20% down on a 2nd home, your LTV (loan to value ratio) range will be 75.01%-80.00% grid. That shows an LLPA of 3.375%. If the purchase price was $500,000, your loan amount will be $400,000 (20% down payment). Now, 3.375% LLPA means, you will be paying an additional cost of 3.375% of the loan amount which will be equal to $13,500. You can choose to take a higher interest rate and minimize that massive hit of $13,500 in closing costs. Note, the higher the interest rate, the lower the closing cost (discount points) you have to pay to get that rate. So, if the base rate on the day of your lock was 4%, you can get the same rate by paying a discount point of $13,500. You’ll of course, still pay for all the other relevant closing costs.

Example 2- High-Balance Loan

Let’s say, you’re buying a $1M home in San Francisco County in California. That’s classified as a high-cost county, so you can qualify for a conforming loan even though your loan amount is $800,000 (higher than the base conforming limit of $647,200. Your LTV (loan to value ratio) range will be 75.01%-80.00% grid. That shows an LLPA of 1% which will be equal to $8,000. So, if the base rate on the day of your lock was 4%, you can get the same rate by paying a discount point of $8,000. You’ll of course even in this example, still, pay for all the other relevant closing costs.

Effective Date

The updated LLPAs are effective for all whole loans purchased on or after Apr. 1, 2022. But it takes lenders 45-60 days from the time you apply for the loan to the time they sell these loans to Fannie Mae and Freddie Mac. This means that a lot of lenders have already implemented these new fees and made 2nd home and high balance loans way more expensive than what it was a few weeks back.

We at InstaMortgage plan to wait one more week before increasing the rate and/or fees on these loans.

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