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How Private Mortgage Insurance On Home Loans Work

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How Private Mortgage Insurance On Home Loans Work

This BLOG On How Private Mortgage Insurance On Home Loans Work Was UPDATED On March 4th, 2018

Private mortgage insurance on home loans, also referred to PMI, is a mortgage insurance program that is created to protect mortgage lenders from default and loss on conventional loans with less than 20% equity.

  • Private mortgage insurance on home loans is the conventional mortgage insurance version of FHA’s mortgage insurance premium
  • If a conventional loan home buyer can put a 20%  or more down payment on home purchase, no private mortgage insurance on home loans is required
  • Any loan to value greater than 80% loan to value, requires private mortgage insurance on home loans with conventional mortgage loans
  • There are huge gaps and variables in how much borrowers pays for private mortgage insurance on home loans on conventional loans versus FHA mortgages

FHA Loans are considered government loans because it is guaranteed by HUD, the parent of FHA. FHA has a one time fixed upfront mortgage insurance premium of 1.75% which can be rolled in the balance of the FHA Loan. FHA also has a lifetime 0.85% FHA Mortgage Insurance Premium on the life of all 30 year fixed rate mortgages.

FHA Mortgage Insurance Premium

Home buyers seeking FHA loans are required to pay mandatory FHA mortgage insurance premium.

  • The FHA loan mortgage borrower needs to pay a one time upfront 1.75% mortgage insurance premium
  • FHA Borrowers also pay 0.85% annual mortgage insurance premium on the balance of the FHA loan for the life of all 30 year fixed rate FHA Loans
  • The 1.75% upfront mortgage insurance premium is added on the balance of the original mortgage loan
  • The home buyer does not have to come up with it upfront at the time of closing
  • The 0.85% FHA annual mortgage insurance premium will always be charged for the life of the FHA loan
  • The only way this 0.85% annual FHA mortgage insurance premium can be eliminated is by the homeowner to refinance the FHA loan into a conventional loan or by selling their home and paying off the balance of their FHA loan

Conventional Loan Private Mortgage Insurance

Private mortgage insurance on conventional loans is a totally different apple compared to FHA mortgage insurance premium.

  • Whether borrowers have good credit, bad credit, high debt to income ratios, low debt to income ratios, compensating factors, or any other positive or negative factors, FHA mortgage insurance premium will remain at a constant 0.85% of mortgage balance amount
  • With conventional loans, it is different
  • Everyone’s private mortgage insurance premium varies depending on several factors
  • It is common sense that the higher loan to value is the higher risk the loan is
  • This because of the smaller down payment borrowers has less skin in the game
  • However, the loan to value is not the only factor that determines private mortgage insurance premium
  • The amount private mortgage insurance factor and the amount of PMI is determined by other factors such as the following:
    • credit scores
    • debt to income ratios
    • type of property
    • PMI is different for the following:
      • purchasing condo, town home
      • single family home
      • multi-family units

No Private Mortgage Insurance On Home Loans With Lender Paid Mortgage Insurance

Many lenders will gives conventional borrowers an option where no private mortgage insurance is required for conventional mortgage loans with higher than 80% loan to value with LPMI

  • This is called lender paid mortgage insurance
  • Referred to it as LPMI and there are no monthly private mortgage insurance premium required to be paid by the mortgage borrower

There is another private mortgage insurance program called single premium mortgage insurance for conventional loans.

  • Single Premium Financed Mortgage Insurance
    • A single premium financed mortgage insurance is similar to FHA upfront mortgage insurance premium
    • Larger upfront premium is charged and the upfront premium is added to the balance of the mortgage loan

How Does Lender Paid Mortgage Insurance On Conventional Loans Work

Lender Paid Mortgage Insurance (LPMI) is a conventional mortgage program where borrowers do not have to pay monthly PMI:

There are two types of LPMI:

  • Lender Paid Mortgage Insurance
    • LPMI With Lender paid mortgage insurance, takes the risk on the conventional loan in lieu of charging the mortgage borrower a slightly higher mortgage rate
    • The higher mortgage rate charged on borrower is determined by the borrower’s risk factor which is determined by evaluating the borrower’s
      • loan to value
      • credit scores
      • credit history
      • debt to income ratios
      • reserves
      • other determinants.
  • Monthly private mortgage insurance
    • The most common form of private mortgage insurance is the monthly private mortgage insurance program where the borrower pays a constant private mortgage insurance premium until the loan to value on their mortgage loan drops to a 78% loan to value
    • Unlike FHA mortgage insurance premium where borrowers cannot eliminate the 0.85% annual FHA mortgage insurance premium, conventional private mortgage insurance can be cancelled as long as owners have had private mortgage insurance for at least two years and have loan to value at 78% LTV or less
    • Determining the value of  property is done by getting a new appraisal
    • If subject property has not gone up in value, borrowers can pay down loan so that you meet the 78% loan to value and can then cancel your mortgage insurance premium

The one time upfront LPMI is a PMI program where borrowers pay a one time upfront PMI and do not have monthly PMI on their conventional loans.

Private Mortgage Insurance Providers

There are several private mortgage insurance companies where most mortgage lenders can get quotes from.

  • All private mortgage insurance companies underwrite every mortgage application similar to how mortgage lenders underwrite their mortgage loan applications
  • A private mortgage insurance company can deny insuring a mortgage loan
  • If this happens, the mortgage lender takes it to a different private mortgage insurance provider
  • Borrowers credit, type of property, and loan to value is taken into consideration in determining PMI

Qualifying With Lender With No Overlays

Home Buyers who need to qualify for mortgage with a national direct lender with no overlays on government and conventional loans can contact us at The Gustan Cho Team at Loan Cabin at 262-716-8151 or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho

www.gustancho.com

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