Mortgage Insurance

What is Private Mortgage Insurance?

If you pay 20% less of the total price of the house as a down payment, then your mortgage lenders will most likely require you to avail of a Private Mortgage Insurance (PMI). PMI will protect the lender in case you default on your mortgage. To avail of this coverage, you will most likely need to pay up to a year’s worth of premium. One way to avoid this cost is to give more than 20% down payment. Another way to avoid PMI is to avail of 80-10-10 financing, which will be discussed further.

How does Private Mortgage Insurance work?

Depending on the mortgage company’s and / or lender’s requirements, the loan-to-value ration, and the loan program involved, private mortgage insurance companies offer insurance that will protect about 20% of the mortgage against default. If a default occurs, the lender can sell the property to liquidate the debt. PMI, then, reimbursed the lender for the remaining amount up to the policy value.

Could obtaining Private Mortgage Insurance help me qualify for a larger loan?

Yes, having a PMI could help you qualify for a bigger loan amount. If your family earns $42,000 annual gross income, pays monthly revolving debts of $800, and have $10,000 down payment and 7% interest mortgage closing costs, the maximum price you can afford without Private Mortgage Insurance is around $44,600. With PMI covering the lender’s gamble, then you may be able to acquire a property worth $62,300. Given this, PMI was able to offer you a 39% more property value.

How much does Private Mortgage Insurance cost?

Depending on the Private Mortgage Insurance Company, the PMI fees can be paid in different ways. One option is for borrower to pay the first-year premium at closing, then, pay the annual renewal premium monthly as part of the payment. Another option is for the borrower to pay no premium at closing, then, add a slightly higher premium monthly to the principal, interest, tax, and insurance payment.

Then for those buyers, who would want to avoid paying PMI at closing and not increase their monthly payment, can choose to finance a lump-sum PMI premium into their loan. With this payment scheme, if the PMI is cancelled through refinancing, paying off the loan, or removal by the loan servicer before the loan term expires, then, the buyers may obtain the rebate premium.

How does the buyer apply for Private Mortgage Insurance?

Though the buyer usually shoulders the cost of the PMI, the mortgage company is the PMI’s client, and looks for PMI deals on the behalf of the buyer. Many lenders do business with few PMI companies because they already know the guidelines of these insurers. This kind of process may cause an issue when one of the lender’s prime companies rejects a loan because the borrower doesn’t fit the risk parameters. Another lender may follow suit and rejects the loan application without consulting even another PMI company. With this situation, all parties involved will not be happy about it.

The lender, though may need to identify the most cost-effective method to soften the liability. With this, the lender is faced with more difficult task of being fair to the borrower. There are times that the lender may appear to the be just to borrower, however, in reality, the lender does have a reasonable justification.

What is 80-10-10 financing?

There are some folks with large salaries that may still find it difficult to save enough money to make a 20% down payment on their dream houses. The usual conventional financing, like buyers getting Private Mortgage Insurance, increases the cost of house ownership and at the same time makes it more difficult to qualify for the mortgage.

However, if you’re dues need to be paid as soon as possible, then don’t lose hope. Since you’re salary is quite high, you can’t escape the possibility of getting stuck with PMI. Because of this problem, 80-10-10 financing was proposed. The 80-10-10 came up with its name because a savings, and loan association, bank or other institutional lender provides a traditional 80% first mortgage, 10% second mortgage, and 10% down payment. Using this method, you are not obliged to acquire a Private Mortgage Insurance for your property.

For the 80-15-5 financing, it follows the same principle of 80-10-10. However, the smaller cash down payment comes with the risk of default on the part of the lender. Thus, lender may still ask you for a higher loan fees and mortgage interest rate for 80-15-5 compared to the interest rate for 80-10-1.

Cancellation of Private Mortgage Insurance

In the year 1999, the Homeowners Protection Act of 1998 took effect. The act established a rule for automatic termination and borrower cancellation of Private Mortgage insurance companies on home mortgages. These apply to certain mortgages filed on or after July 29, 1999. These mortgage applications are usually for the purchase, initial construction, or refinancing of the single-family home. However, these protections are not applicable to government-insured FHA or VA loans with lender-paid PMI.

For home mortgages signed on or after July 29, 1999, your Private Mortgage Insurance must be terminated automatically, when you reach 22% equity of your home, based on the original property value, and your mortgage payments are current. PMI can also be cancelled upon request once you reach 20% equity of your home.

If your loan is “high-risk”, then you may still need to obtain a PMI. If you haven’t been paying your credit card payments within the year and prior to the time of termination or cancellation, then you also may need to acquire PMI. Aif you have liens on your property, then, you may also need to get a PMI. For more information about these requirements, take the time to reread it again and / or call us.

If you signed your mortgage before July 29, 1999,then you may be able to request for the PMI to be cancelled once you exceeded 20% equity in your property. However, federal law doesn’t require for lenders or mortgage companies to cancel the insurance.

History of Private Mortgage Insurance

Private Mortgage Insurance started in the 1950’s. This was established with the first large carrier, named Mortgage Guaranty Insurance Corporation (MGIC), which is also fondly called as “magic”. For one reason to another, the earlier PMI methods are seen to “magical” aid the lender to gain approval on an otherwise unacceptable loan package. Currently, there are eight Private Mortgage insurance underwriting companies in the United States.

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