What Happens When You Have a High-Priced Mortgage Loan (HPML)
It happens in lending from time to time.
On occasion, rates are so high that they trigger the requirements of a High-Priced Mortgage Loan, also called an “HPML.” In many cases, this means the only solution is to establish an impound account, which needs to be funded by the borrower.
It all comes down to risk and risk mitigation, which is a fundamental tenant for lending of all varieties. Some loans with high interest rates require specific measures, including a sum of money held in escrow, also known as an impound account.
So, what is a High-Priced Mortgage Loan (HPML) and what are the requirements? Understanding the details of an HPML will make you a more informed, confident, and responsible borrower.
What is a High-Priced Mortgage Loan and How Does it Affects Borrowers?
One Step Back: A Quick Look at APOR
To fully understand HPML, we have to take a quick step backwards. First, we need to understand Annual Prime Offer Rate, or APOR. This is a survey-based estimate of annual percentage rates that is currently offered on prime mortgages. These are the rates that are used for fixed-rate and adjustable-rate mortgages, and they can vary from institution to institution.
Essentially, APOR is an average of the interest rates used by many different institutions. The average, which is published by the Federal Financial Institutions Examination Council, is used as the basis to gauge whether or not a loan is considered a High-Priced Mortgage Loan.
What is an HPML?
First, let’s start by defining HPML, as the term can be slightly confusing and will lead to a lot of confusion and, in some cases, outright frustration among loan applicants. An HPML is simply a loan that has a significantly higher annual percentage rate than the benchmark averages. In most cases, your mortgage will be considered “high priced” if it has an interest rate that is a certain percentage higher than the Average Prime Offer Rate, which is the average rate based on a survey of prime mortgage loans. However, the rate that triggers HPML requirements will vary depending on the type of loan you need.
A first-lien mortgages, for example, will be considered an HPML if it has a rate that is 1.5% higher than the current APOR. A first-lien mortgage is simply a loan where the bank or lending institution is first in line for repayment in the event of a foreclosure. This applies to a majority of mortgage loans in the United States.
A jumbo loan can also be an HPML. If your loan is a first-lien jumbo loan, is will be considered higher priced if the percentage is 2.5% higher than the APOR.
While most loans are considered first-lien loans, there are also subordinate loans, also known as second-lien loans. This simply means that the bank is not first in line for repayment if there is a default. A subordinate mortgage usually becomes an HPML if it has an interest rate of 3.5% higher than APOR.
Here’s how it usually works…
Say you work with a lender and get approved for a jumbo loan with an interest rate of 7%. The lender checks the listed APOR and discovers that the current average is 4.5%. This means your offered interest rate is 2.5% higher than the APOR, which means the loan would be an HPML. This means the loan could be more expensive than a mortgage with typical terms, and your lender will have to take a few extra steps to help you get approved.
What it Means When Your Loan is HPML
You may come across this situation in your search for a loan. You’ll discover that the rates are high and they trigger the requirements for an HPML. In many cases, your lender will have to obtain a full interior appraisal of the property, which will need to be completed by a qualified appraiser. If it is a flipped home, the lender may have to provide an appraisal of your home for free, and in some cases they may have to maintain an escrow account that is held for five years or more. The money in escrow is basically held in savings and will be untouched unless there is a default on the loan. This provides another level of risk-reduction for the banks.
Adding Impounds to Reduce Risk
Depending on the nature of your loan and the requirements from the lender, you may be required to provide financial resources for an “impound” account, which is essentially another way of saying escrow. This is simply an account that is held by the mortgage company to collect insurance and tax payments for the property. Since these are necessary for you to keep the home, and are therefore important to the lender, many lenders will require a certain amount be paid as an impound. They are not, however, generally considered to be part of the mortgage. The amount that is required will vary, but it is generally determined by looking at the annual costs of insurance for the home (including all forms of insurance) as well as the taxes that will be required.
In most cases, an impound account will not be required by law. However, it may be required by state or federal law, depending on the nature of your loan. If the loan is made or supported by state or federal institutions, there is a better chance that the loan will require an impound account. It may also be required after the loan has been issued if the borrower fails to make two consecutive tax installments on the property. It can also be required if the LTV for the loan is 90% or higher. If the combined principle amount of all loans secured by the real property exceeds 80% of the appraised value, it may also be required.
Providing Expert Guidance on HPMLs
If you want more information about High Priced Mortgage Loans, contact the helpful team at San Diego Purchase Loans. We’ll provide all the details on these loans, including their requirements, as well as steps you might take to avoid higher costs or added hassle on your loans.
With a common-sense approach to lending, we can help you get approved for an affordable loan with excellent terms and rates.