In today’s market, it is difficult to find mortgage lenders willing to work with borrowers who do not have private mortgage insurance. In fact, only about one in four borrowers has their loan backed up by this type of lender. But what is this product really for? Private mortgage insurance makes it easier for lenders to foreclose on their properties if the borrower falls behind on their payments. This means that many people without PMI are actually getting a better deal than those who pay the hefty premium every month.
Most conventional mortgages come with loans that require the borrower to pay for insurance against defaulting on their payments. These policies are required to cover the lender against financial loss in case of foreclosure. The amount of this insurance premium must be paid by the borrower each and every month, whether or not they are paying off their mortgage balance that month.
At first glance, this requirement may not seem like much of a deal-breaker. After all, mortgage payments usually consist of several hundred dollars per month anyway. But in the case of a large down payment, a smaller mortgage, and less amortization the PMI premium can really add up. This means that many people who are looking to save money on their monthly housing costs by getting a lower rate and smaller down payment actually wind up spending hundreds of dollars per month more because of this requirement.
The Basics of PMI
Private mortgage insurance is a mandatory type of policy that is placed on the back end of each loan. Either the lender or the borrower can pay for this insurance, but it must be paid in full in order for the borrower to get a home loan. The rates and coverage are standardized by law, so there are no surprises that come with this product. This makes it easier for borrowers to compare different options when looking at mortgages in an area where many different lenders are competing against each other.
The Qualifications for PMI
Primarily, most lenders will look at the amount of the down payment and how much the borrower is currently making. Even though there are some who will not require PMI until after a certain amount of equity has been built up in the property, most lenders who do not require PMI will simply require a certain amount of monthly income as well. They may even consider the credit history and type of previous loans that have been used to get a loan.
About 30% of all loans in the United States are backed by PMI.
The amount of money a lender will allow a borrower to borrow based on their income and the available property for sale varies widely. Therefore, this will also influence how much PMI goes into the loan.
After determining the amount that the borrower can afford to pay based on their income, they can use that as an estimate of how much they will be able to pay over a thirty-year period.
There are a few instances where the lender will not require PMI. The most common is when a property has already been owned for less than three years, or when there is an equity buffer (usually around fifteen percent) built up in the property. A small number of lenders will actually back loans without PMI in areas that have experienced extreme volatility in property values, such as areas with poor economic trends. There are also some who will only require PMI for loans that are financed with government backed loans, such as FHA or VA.
The loan-to-value ratio that the lender is looking for varies wildly. Usually, for a smaller down payment and with a standard thirty year fixed rate mortgage, this will be somewhere between 80% and 90%. For example, if the borrower has a 20% down payment and is paying around four percent in interest on their mortgage, this loan-to-value ratio might be 90%.
For Ginnie Mae loans, this ratio is usually set to 95% or more. The reason for this is that these loans are backed by the government’s guarantee program and therefore pose a greater risk to the lender.
The terms of the loan will have a direct impact on what kind of mortgage insurance product the borrower has to pay for. Those who choose shorter terms will typically have to pay more each month towards their PMI payments. This is because their monthly payments are spread across a shorter period of time, meaning that they have to pay off the loan faster.
The Income Factor
The borrower’s current income will determine how much PMI goes into each mortgage payment. This number will be based on the maximum amount of income deemed acceptable by the lender and then divided by twelve. For example, if the borrower’s maximum monthly income is $6,000 per month, this will be divided by twelve to determine the monthly PMI payment at approximately $530 per month.
For larger mortgages, a higher rate of income will increase the amount of PMI that needs to be paid each month. For example, if the borrower is making $8,000 per month and has a loan value of $100,000 it will require approximately $2,000 per month towards their PMI to make sure that the lender is adequately protected.
For Ginnie Mae loans this variable is often set to 100% income payments. This means that the PMI will only be required when the house value reaches a certain threshold. This is set at 80% of the original purchase price for these loans.
Types of PMI
There are two different types of PMI that a borrower can choose from. The main difference between them is usually the length of time that they will cover a loan for. For example, some will cost more per month than others but will cover the loan for a longer period of time. Others may be less expensive in total but will require the borrower to pay more each month but only cover the loan for a shorter amount of time.
Every borrower will have to choose what type of coverage they want to go with when it comes to private mortgage insurance, and there are several different factors that will influence this decision. The down payment, loan amount, loan terms and even the lender may play a part in this decision.
Therefore, one month’s mortgage payment may be significantly cheaper than the other’s but the borrower may end up paying more in the long run because of the term remaining on their mortgage. This is especially true when considering whether or not to pay for PMI at all.
Security and Protection
Private mortgage insurance coverage will provide the lender with a basic level of protection. The most common coverage is called traditional insurance, and it is offered in two different forms. The first kind of private mortgage insurance is coverage that protects the lender up to 80% of the property value if the borrower defaults on payment. The second form provides unlimited protection if there is a total loss on property damage, fire, or theft.
The half-percent down coverage that is offered on some of the government-backed loans, such as FHA, will provide a certain level of protection to the lender in case the borrower does not make their payments. However, this kind of coverage is limited to covering a maximum of forty percent of the outstanding loan balance.
Therefore, most lenders will bundle this form of insurance with traditional private mortgage insurance. The most common form is voluntary insurance that covers up to 80% in case there is a default on payment by the borrower. In some cases, these insurance packages will even pay for the lender to cover its losses on property damage, fire and theft.
When it comes to traditional mortgage insurance the coverage amount used by the lender will be determined by many factors and it can change from month-to-month. On very rare occasions, the down payment made by borrowers could make up a much larger percentage of their monthly payments and therefore increase how much they are required to pay towards PMI.
For those who are concerned about the amount of money that they may be required to pay towards this insurance coverage should make sure that they have chosen a mortgage lender who will work with them to ensure that they are getting the right product.
Voluntary vs. Traditional
The type of private mortgage insurance that is chosen by borrowers will depend on several different factors. These typically include how much risk the borrower wants to take when it comes to protecting their lender and what kind of loan they are using. For example, those who are using FHA loans may be able to get away with paying for voluntary insurance rather than a traditional coverage.
Every borrower will have to do their own due diligence before deciding which type of mortgage insurance is right for them, and they may want to make sure that the lender they work with has access to a wide range of different products. This will make it easier for the lender to find one that fits within their budget and also offers them the level of protection that they need from this type of coverage.