How to Avoid Lender-Paid Mortgage Insurance
This article covers how lender-paid mortgage insurance works for conventional loans.
Fannie Mae and Freddie Mac, the two mortgage giants under the direction of the Federal Housing Finance Agency (FHFA), set the rules and regulations for conforming loans. According to these rules, borrowers with a loan-to-value ratio of up to 97% can qualify for a conforming loan without having to pay annual mortgage insurance.
However, borrowers have to pay a one-time private mortgage insurance premium up front, which is called lender-paid mortgage insurance, commonly referred to as “LPMI.” This one-time, up-front private mortgage insurance premium is similar to the one-time FHA mortgage insurance premium. In this article, we discuss LPMI and how it works on conventional loans.
What Is a Conforming Loan?
Conventional loans are called “conforming loans” because they must conform to Fannie Mae and Freddie Mac guidelines. Mortgage insurance is required for all conventional loans with greater than 80% loan to value. Conforming loans are not government loans and are not guaranteed by any government agency; therefore, the rate for private mortgage insurance on conventional loans is not fixed like it is for FHA loans.
All FHA loans require mortgage insurance of 0.85% of the mortgage balance amount throughout the life of a 30-year, fixed-rate FHA loan. For conventional loans, mortgage insurance is mandatory until the property has at least an 80% loan to value.
Unlike mortgage insurance for FHA loans with a set limit of 0.85% of the mortgage balance, private mortgage insurance premiums vary for conventional loans. The amount is based on risk: The lower the risk, the lower the mortgage insurance factor. It all depends on the borrower’s credit and financial profile, loan to value, and property type. Premiums can be much lower than FHA MIP for higher credit-profile borrowers.
Lender-Paid Mortgage Insurance: How to Avoid FHA Mortgage Insurance Premiums
Lender-paid mortgage insurance, also known as “LPMI,” is where a borrower does not have to pay private mortgage insurance on conventional mortgage loans that have a higher than 80% loan-to-value ratio.
Borrowers need to pay a 0.85% FHA mortgage insurance premium on the balance of their mortgage loan every year for the duration of their FHA loan. But they can eliminate this monthly mortgage insurance premium by refinancing their FHA into a conventional lender-paid mortgage insurance loan if they have greater than an 80% loan to value.
Lender-Paid Mortgage Insurance Conventional Mortgage Program
Conventional loans generally have higher credit requirements than the credit requirements of FHA loans. And the rates on conventional mortgages are also higher than the FHA-insured mortgage rate. Conventional mortgage loans are credit-sensitive, unlike FHA loans. The higher credit scores are, the lower mortgage rates tend to be. To get the best conventional mortgage rates on the market, the mortgage loan borrower needs a credit score of over 740.
Two Types of LPMI
There are two types of conventional LPMI programs.
The first conventional LPMI program is where there are no fees or up-front mortgage insurance costs, but the mortgage rates are about 0.50% higher than regular conventional mortgage rates.
The second type of lender-paid mortgage insurance program is where the borrower gets the same par conventional mortgage rates but they are charged an up-front mortgage insurance premium. The up-front mortgage insurance premium can be paid by a seller’s concession on purchase transactions.
Homebuyers looking to qualify with a direct lender that doesn’t have mortgage overlays can contact Gustan Cho Associates at 262-716-8151 (text us for a faster response) or send an email to [email protected]