Higher-Priced Mortgage Loan: What It Is and How To Avoid It

A higher-priced mortgage loan, like the name suggests, is a home loan that has above-average costs. These loans can be more expensive over time and often have stricter rules and requirements than standard mortgages. Here’s what you should know about high-priced mortgage loans, including how they work and how to avoid them.

Key takeaways

• The rules for higher-priced mortgage loans are established in Section 35 of the Truth in Lending Act.
• Higher-priced mortgages have annual percentage rates (APRs) that exceed the average prime offer rate (APOR).
• A first mortgage is generally considered “higher-priced” if it’s at least 1.5 percentage points higher than the APOR.

What is a higher-priced mortgage loan?

A higher-priced mortgage loan (HPML) is a mortgage with an annual percentage rate (APR) that’s higher than the average prime offer rate (APOR). The Federal Financial Institutions Examination Council (FFIEC) sets the APOR based on a weekly survey of average interest rates and terms offered to highly qualified borrowers.

Because HPML loans typically come with higher mortgage rates, monthly payments and closing costs, lenders are required to take extra precautions to make sure you can repay your loan (more on this below). Your APR is not the same as your interest rate — rather, it’s a measure of the total cost to borrow your mortgage and includes origination fees, discount points, mortgage insurance and other costs.

HPML rules only apply to first mortgages, second mortgages and jumbo loans on homes used as your primary residence.

Higher-priced mortgage loan example

Let’s say you were approved for a conventional first mortgage loan with a 6.95% APR, but the current APOR is 5%. This means your APR is 1.95% higher than the APOR. Since your APR is more than 1.5 percentage points higher than the APOR, your loan is considered a higher-priced mortgage loan.

Using the hypothetical rates above, here’s a breakdown of what your monthly principal and interest payments would look like. This example assumes a $300,000 home price and 20% down payment ($60,000).

In this example, you’d pay about $300 more monthly for the higher-priced loan.

What are HPML requirements?

Lenders must take extra steps to prove you can repay a higher-priced mortgage loan, which may include:

• Ordering a home appraisal. HPML loans may trigger a home appraisal requirement for loan programs that don’t typically require one, like the FHA streamline refinance.
• Ordering a second appraisal. If you’re buying a home that was recently “flipped” (purchased, fixed up and re-listed for sale within a short time period), the lender might order a second appraisal.
• Maintaining an escrow account for at least five years. Lenders may require you to establish an escrow account, regardless of your down payment amount, to ensure you pay your property tax bills and homeowners insurance premiums on time.
• Confirmation you’re borrowing at least $33,500. HPML rules apply to loan amounts of $33,500 or higher. If you’re borrowing less than that, you’ll be exempt from the extra HPML requirements.

Where you live influences how your lender handles an HPML loan, but your loan officer should be familiar with the guidelines that apply to your situation.

How to avoid HPML loans

1. Don’t take out an FHA loan
2. Boost your credit score
3. Make a bigger down payment
4. Ask the seller to pay closing costs
5. Reconsider buying a manufactured home

1. Don’t take out an FHA loan

First-time homebuyers often opt for FHA loans because they allow for lower credit scores and higher debt-to-income (DTI) ratios (your DTI ratio measures your total monthly debt compared to your gross monthly income). However, the total median loan costs for FHA loans was $11,368 in 2023 — the highest among several different loan types — according to Consumer Financial Protection Bureau (CFPB) data.

Three features of FHA loans often lead them to cross the HPML threshold:

1. You must pay two types of mortgage insurance. FHA borrowers pay a lump-sum upfront mortgage insurance premium (UFMIP) of 1.75% of their loan amount, plus an ongoing annual mortgage insurance premium (MIP), which ranges from 0.15% to 0.75%. FHA mortgage insurance premiums are factored into the APR calculation.
2. You’re stuck with mortgage insurance for the life of the loan if you make the minimum down payment. A 3.5% down payment comes with lifetime mortgage insurance premiums. You can stop paying annual MIP after 11 years if you put down at least 10% — otherwise, you can’t remove it even if your home’s value rises.
3. Credit score minimums may lead to higher interest rates. FHA-approved lenders offset the risk of allowing lower credit scores by charging higher interest rates. This means you might pay more for your FHA loan over the long term compared to other mortgage types.

 Learn about the different types of mortgage loans available to you.

2. Boost your credit score to qualify for a conventional loan

Conventional mortgages require private mortgage insurance (PMI) when you put down less than 20% — though you can remove PMI after you’ve reached 20% equity.

Save money on mortgage insurance costs (and avoid the additional HPML restrictions) by taking some extra steps to boost your credit score past 620, the typically required minimum for most conventional lenders.

Pay your credit card balances down.

Keeping your credit account balances below 30% of your total available credit will go a long way to increasing your score — plus, it’ll also lower your DTI ratio.

Pay everything on time.

A recent late payment will damage your credit score, so put your payments on autopay to avoid missing a payment. If you do pay late, wait three to six months to give your scores time to recover before applying for a home loan.

Shoot for a credit score above 780 to get the best conventional rate.

You’ll have access to lower rates by boosting your credit score to at least 780, according to guidelines established by Fannie Mae and Freddie Mac — these two government-sponsored agencies set the rules for conventional loans.

 Don’t know your credit score? Get your free score on LendingTree Spring today.

3. Make a bigger down payment

The bigger your down payment, the lower your conventional PMI premiums will be. Lower monthly mortgage insurance costs lead to a lower APR, which may help you dodge the HPML threshold. In addition, making a 20% down payment means you’ll avoid PMI altogether.

4. Ask the seller to pay closing costs

Lenders calculate your APR based on the amount of costs you’ll actually pay. FHA loans allow a seller to pay up to 6% of the purchase price toward your closing costs. This could help push your APR below the HPML limits, so you won’t have to deal with HPML requirements.

5. Reconsider buying a manufactured home

Although manufactured home loans account for a small percentage of loan originations each year, they tend to exceed HPML limits.

Which loans are exempt from HPML requirements?

Construction loans. HPML rules don’t extend to construction loans to finance a newly built home. However, the rules do come into play with any permanent mortgage used to replace the construction loan after the home is completed.

Rural and underserved areas. If you’re buying in a rural area and taking out a mortgage at a smaller bank, you might not need an escrow account.

Planned unit development or condo association insurance. Buyers may not have to add the cost of homeowners insurance to an escrow account if their monthly homeowners or condominium association has a master insurance policy that protects all of the units in the development. However, these types of policies may not cover losses like burglaries or fires inside your home, so it’s wise to buy a separate homeowners insurance policy to protect everything within the walls of your home.