How Private Mortgage Insurance On Home Loans Work

This Article Is About How Private Mortgage Insurance On Home Loans Work:

Private mortgage insurance on home loans also referred to PMI, is paid by the borrower to benefit lenders. PMI is a mortgage insurance program that is created to protect lenders from default and loss from borrowers defaulting on conventional loans. Lenders require any borrower with less than 20% equity on conventional loans to purchase private mortgage insurance.

Private mortgage insurance on home loans is the conventional mortgage insurance version of FHA’s mortgage insurance premium. Homebuyers who put at least 20% or more down payment on home purchases do not need PMI. Any loan to value greater than 80% loan to value, requires private mortgage insurance on conventional mortgage loans.

There are variables on how much borrowers pay for private mortgage insurance on conventional loans. FHA annual mortgage insurance premium is at a fixed rate of 0.85% annually based on the loan balance. Private mortgage insurance on conventional loans is dependent on various factors such as the borrower’s credit scores, type of property, loan to value, and other variables.

FHA Mortgage Insurance Premium

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FHA Loans are government-backed home mortgage loans. FHA loans are 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% annual FHA Mortgage Insurance Premium on the life of all 30 year fixed rate mortgages
• No matter what the loan to value is on an FHA loan, the annual FHA MIP is charged on all 30-year fixed-rate mortgages

The only way the FHA MIP can be removed is by either paying off the FHA loan or refinancing the FHA loan to a conventional loan.

Types Of FHA Mortgage Insurance Premium

Homebuyers seeking FHA loans are required to pay mandatory FHA mortgage insurance premiums.

Borrowers need to pay a one-time upfront 1.75% mortgage insurance premium. Borrowers also pay 0.85% annual mortgage insurance premium on the balance for the life of all 30-year fixed-rate FHA Loans. The 1.75% upfront mortgage insurance premium is added to 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 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 the 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 is because the smaller down payment borrowers have less skin in the game. However, the loan to value is not the only factor that determines private mortgage insurance premium.

Factors Affecting Premiums On Private Mortgage Insurance

The amount private mortgage insurance factor and the amount of PMI are 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, townhome
• single-family home
• 2 to 4-unit multi-family homes

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

Many lenders will give 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 premiums 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
• A 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 the 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
• 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 canceled as long as owners have had private mortgage insurance for at least two years and have a loan to value at 78% LTV or less
• Determining the value of the property is done by getting a new appraisal
• If the subject property has not gone up in value, borrowers can pay down the 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 are taken into consideration in determining PMI.

Qualifying With Lender With No Overlays

Home Buyers who need to qualify for a mortgage with a national direct lender with no overlays on government and conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.