It’s commonly understood that people with great credit get the best interest rates from credit cards to home loans. And that’s true but it really goes beyond that. Historically the method was called “risk based pricing” and while banks still use that term it really applies to what is known as Loan Levelloan level price adjustments Price Adjustments, or LLPA. What is LLPA and what is the impact for real estate investors?

The impact for real estate investors directly affects monthly cash flow. Market rents will be based upon comparable rents for the area but it’s the interest rate on the loan that determines the monthly mortgage payment. The lower you can go, the greater the cash flow. LLPAs assign risk to basic loan parameters including the amount of down payment and the credit score of the primary borrower.

LLPAs are fees assigned various combinations of risk assigned by Fannie Mae and Freddie Mac, the two mortgage giants responsible for issuing investment property lending guidelines. But instead of assigning a fee for this rate and down payment combination or another, the interest rate on the loan is adjusted up or down.

For example, an investor putting down 20 percent on a rental property loan will have a slightly higher rate compared to putting down 25 percent. More equity from the borrower means less risk to the lender, hence the adjustment.  Investors who put more than 25 percent down, however small the increase, can see yet another interest rate decline.

Borrowers with credit scores above 740 enjoy the best rates while borrowers with a credit score of less than 620 may not get financing at all although some individual lenders will make an exception. The combination of initial equity and the credit score adjusts the interest rate and many times those with a lower score can offset the adjustment in rate with more down payment. All conventional lenders use this matrix and pricing tool so the adjustments will be similar no matter which bank makes the final loan.