Private Mortgage Insurance On Home Loan Guidelines

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Private Mortgage Insurance On Home Loan Guidelines

This BLOG On Private Mortgage Insurance On Home Loan Guidelines Was UPDATED On April 28th, 2019

Private mortgage insurance on home loan is a mortgage insurance policy that is required by mortgage lenders for borrowers who have conventional loans with 20% or less equity.

  • FHA loans have mandatory mortgage insurance premium requirements too
  • But on this article, we will discuss private mortgage insurance on home loan required by conventional lenders
  • Borrowers need to pay private mortgage insurance on home loan
  • However, private mortgage insurance on home loan has no benefits for homeowners
  • Only benefits the mortgage lender if borrower defaults on their home loan
  • Private mortgage insurance on home loan offers protection to the lender in the event if borrowers ever default on their home loan and the mortgage loan goes into default
  • Many homeowners get confused and think that private mortgage insurance on home loan pays borrowers heir in the event of homeowner’s death
  • This is not the case
  • There is a type of mortgage insurance that covers the homeowner
  • It pays the mortgage loan balance in the event of the homeowner’s death
  • But the premium is not worth it
  • Homeowners are better off in getting a life insurance policy
  • With life insurance policy benefits are sufficient enough to pay off their mortgage balance in the event of homeowners death so their spouse or heirs will not be liable for making the mortgage payments

Why Do Mortgage Lenders Force Borrowers To Pay Private Mortgage Insurance On Home Insurance?

Borrowers do not elect whether or not to have private mortgage insurance coverage.

  • It is forced upon them by their lenders in order for the lender to fund the mortgage loan
  • Mortgage lenders will make borrowers have private mortgage insurance on home loan if they put less than a 20% down payment on their home purchase or have an 80% loan to value on their refinance mortgage
  • The greater the loan to value, the greater the risk the lender has
  • Mortgage lenders feel comfortable for home buyers who put down 20% or more in down payment
  • Home Buyers with 20% down payment on conventional loans do not require private mortgage insurance on home loan
  • The less money the home buyer puts down on the home purchase, the greater the risk lenders have
  • This is why private mortgage insurance on home loan is required for buyers putting a down payment of less than 20% down payment on conforming loans
  • The bottom line is lenders wants to insure the mortgage loan they have funded against default and minimize their losses in the event property forecloses

Who Picks Private Mortgage Insurance Company On Home Loan?

Unfortunately, borrowers have no say so on which private mortgage insurance company lenders will select to be private mortgage insurance carrier nor can you negotiate the premiums.

  • The mortgage lender has a select group of private mortgage insurance companies
  • Private mortgage insurance premiums on home loan depend on risk factors such as how much money buyers are putting down, credit scores, credit history, and debt to income ratios

The way private mortgage insurance works are if buyers put a 5% down payment on a home and in the event if homeowners ever default on a mortgage loan and the home goes into foreclosure, the private mortgage insurance company will pay up to 15% to the mortgage lender against their losses.

  • For example, here is a case scenario:
    • Homebuyer purchased a $100,000 home and put 5% down payment ( $5,000 )
    • Home Buyer stopped making payments
    • The home went into foreclosure
    • The home sold for $75,000 at the sheriff’s sale
    • The private mortgage insurance company will insure up to 80% of the loan to value of home’s original purchase price of $100,000
  • Home Buyer put $5,000 down payment
  • 80% of the total original purchase price is $80,000
  • Total loss value of $20,000
  • $15,000 is the amount the private mortgage insurance company is liable for
Private Mortgage Insurance On Home Loan

Can I Cancel My Private Mortgage Insurance On Home Loan?

Homeowners with FHA loan would get charged a one time upfront mortgage insurance premium of 1.75% of the mortgage balance and a lifetime 0.85% annual mortgage insurance premium ( divided by 12 monthly payments and escrowed ) for the life of the FHA loan.

  • However, the good news with conventional loan private mortgage insurance premium can be canceled if the home has 80% LTV
  • If the equity in the home rises over the 20% mark either through appreciation of property or paying down the existing mortgage balance, homeowners will be eligible to cancel private mortgage insurance
  • This can be done by contacting the mortgage lender and making them aware of this fact

The mortgage lender will most likely order an appraisal. Homeowners pay for the new appraisal. Homeowners have no say so on which appraiser to use.

  • The mortgage lender will choose an appraisal company through the use of an Appraisal Management Company
  • If the appraisal states home value has at least 20% equity, homeowners are eligible to cancel private mortgage insurance premium forever

Are There Ways Of Avoiding To Pay Private Mortgage Insurance On Home Loan?

There are options for avoiding to pay private mortgage insurance.

  • The first most obvious option is to put a 20% down payment
  • Unfortunately, many home buyers, especially first time home buyers, do not have the 20% down payment to put down on their home purchase
  • There is another conventional mortgage loan program called Lender Paid Mortgage Insurance, also referred to LPMI
  • Lender Paid Mortgage Insurance is when there is no mortgage insurance required to be paid by the borrower
  • Mortgage lender covers the private mortgage insurance on their part
  • Nothing is free in this world and someone needs to pay for this
  • It will be the borrower that will pay for the LPMI
  • In lieu of a slightly higher rate, borrowers can choose the Lender Paid Mortgage Insurance conventional loan program instead of paying separate private mortgage insurance
  • Borrowers will need to discuss the pros and cons which program better suits them

Exploring Piggyback Second Mortgages

Borrowers can also explore the option of going with a piggyback 80/10/10 where they get a first mortgage of 80% loan to value and get a second mortgage of 10% and put a 10% down payment.

  • Most second mortgage lenders expect a minimum credit score of 720 in order to extend a second mortgage for this type of loan program
  • VA Loans do not require private mortgage insurance so veteran home buyers are eligible for VA Home Loans
  • There is no minimum credit score requirements on VA Loans
  • There is no maximum debt to income ratio requirements on VA Loans
  • Gustan Cho Associates Mortgage Group has no VA Lender Overlays on VA Home Loans

NON-QM  mortgage loans do not require private mortgage insurance on home loan. However, NON-QM Loans and Bank Statement Mortgage Loans For Self Employed Borrowers have mortgage rates are much higher than standard conventional mortgage rates. Home Buyers and homeowners who need to qualify for mortgage with a direct lender with no mortgage overlays on government and conventional loans can contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

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