PMI On Conventional Loans With Higher Than 80% LTV
This BLOG On PMI On Conventional Loans With Higher Than 80% LTV Was Updated On April 11, 2017
PMI On Conventional Loans With Higher Than 80% LTV is mandatory per Fannie Mae and Freddie Mac Guidelines. Private Mortgage Insurance protects mortgage lenders in the event borrowers go into default and the home goes into foreclosure. Private Mortgage Insurance is Fannie Mae and/or Freddie Mac’s version of mortgage insurance where FHA insures lenders on FHA Loans that default. Foreclosure proceeding start after the homeowner stops making their monthly mortgage payments for 4 months. Lenders do not want borrowers to go into foreclosure because nobody wins when a borrower goes into foreclosure: Both the homeowner and lenders loses. The homeowner will not just lose their home but also their credit rating will plummet where it will take time for them to re-establish their credit to qualify for mortgage again. The private mortgage insurance company pays the mortgage lender the money lost from the foreclosure. The lender loses also even though they get the loss from the mortgage insurance company because of the time and legal fees invested in the foreclosure proceedings. Private Mortgage Insurance companies have different premiums which depends on the borrowers.
Here is what affects the premium of PMI On Conventional Loans With Higher Than 80% LTV:
- Borrowers credit scores affects the premium of PMI
- The type of property affects the premium of PMI. A single family home has the lowest premium. Condos, townhomes, and two to four unit properties are considered higher risk so PMI is higher
- The amount of down payment on a purchase and loan to value on a refinance affects premiums on PMI. The lower the loan to value, the lower the premium
- Private Mortgage Insurance premiums can vary depending on borrowers and the property where FHA mortgage insurance remains constant at 0.85% no matter what the borrower’s credit score or property type
Cost Of PMI On Conventional Loans With Higher Than 80% LTV
The cost of PMI On Conventional Loans With Higher Than 80% LTV is paid by the mortgage loan borrower to benefit the mortgage company. The private mortgage insurance company works directly with the mortgage lender but the premium is paid by borrowers. Mortgage borrowers do not have any benefits from the PMI they pay. Private Mortgage Insurance is different than credit life insurance also known as mortgage life insurance. Mortgage life insurance pays the balance of the mortgage in the event the person who took out the policy dies.
The Secondary Market
The mortgage company’s decision to use private mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require private mortgage insurance on all loans made with low down payments.
The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.
Government Versus Private Mortgage Insurance
Lower down payment home purchase or higher loan to value refinance mortgages require mortgage insurance. There are two types of mortgage insurance:
- Government Mortgage Insurance
- Private Mortgage Insurance
Mortgages Backed By Government Agencies
Here are the government mortgage insurance providers to mortgage companies:
- Federal Housing Administration ( FHA )
- The United States Department of Veteran Affairs ( VA )
- Farmers Home Administration ( FmHA )
Conventional Loans & PMI On Conventional Loans With Higher Than 80% LTV
Fannie Mae and Freddie Mac are the two mortgage giants in the U.S. that sets the guidelines for Conventional Loans. Both Fannie Mae and Freddie Mac are government sponsored private companies that purchases Conventional Loans by mortgage companies as well as they conform to their lending guidelines. Conventional Loans are not guaranteed by the government but are insured by private mortgage insurance companies. Lenders do not require PMI for home buyers who put at least 20% down payment on a home purchase or homeowners who refinance their mortgages with 20% or more equity. The reason being is because the homeowner has enough skin in the game and if the borrower were to default, there is at least 20% equity so the risk is minimal for lenders.
Private Mortgage Insurance
There are different types of private mortgage insurance programs for Conventional Loan borrowers.
Here are some of the PMI programs:
- One time upfront private mortgage insurance: This type of private mortgage insurance is where borrowers pays a one time upfront private mortgage insurance and there are no monthly PMI payments. Similar to the Upfront FHA mortgage insurance premium.
- Lender Paid Mortgage Insurance: Conventional borrowers do not have to pay monthly PMI because it is already figured in on the mortgage rate. LPMI is very popular where for a slightly higher mortgage interest rate, there is no monthly private mortgage insurance on Conventional Loans.
- Borrower Paid Mortgage Insurance: This is when borrowers pays a monthly mortgage insurance along with their principal and interest payments. Borrower paid PMI can be canceled when the loan to value of the home reaches 80% LTV.