What Is Lender Paid Mortgage Insurance And How Does It Work
This Article Is About Lender Paid Mortgage Insurance And How Does It Work
Lender Paid Mortgage Insurance is also referred to as LPMI. Lender Paid Mortgage Insurance applies to Conventional Loans only. Private Mortgage Insurance is required for all Conventional Loans with less than a 20% down payment. We will be discussing the various private mortgage insurance options borrowers have on conventional loans on this blog.
Understanding Lender Paid Mortgage Insurance
Borrowers do not have to pay Private Mortgage Insurance premiums on conventional loans if they opt to choose a product called Lender Paid Mortgage Insurance. Lender Paid Mortgage Insurance is also known as LPMI. LPMI is a one-time upfront private mortgage insurance premium borrowers can pay and not be charged an annual mortgage insurance premium. It is similar to the one-time 1.75% upfront FHA mortgage insurance premium charged by HUD.
HUD, the parent of FHA has a mandatory one-time FHA MIP as well as an annual 0.85% mortgage insurance premium for the life of a 30-year fixed-rate FHA loan. Borrowers who choose Lender Paid Mortgage Insurance do not have to pay monthly PMI or private mortgage insurance premiums.
In this article, we will cover and discuss how lender private mortgage insurance works on conventional loans.
Why Is Private Insurance Mortgage Premium Required On Conventional Loans
There are two types of mortgage insurance premiums required with FHA Loans. A one-time upfront FHA mortgage insurance premium of 1.75%. The second type of mortgage insurance is lifetime annual mortgage insurance premium for the life of a 30-year fixed-rate FHA Loan.
The annual FHA MIP is 085% of the FHA loan balance:
- Annual FHA MIP is divided up into 12 payments
- The annual 0.85% of the FHA MIP is part of borrowers monthly mortgage payment
- With Conventional Loans, borrowers who put 20% or more down payment, the private mortgage insurance premium is not required
- However, the private mortgage insurance premium is required for any home buyers who purchase a home with a Conventional Loan but puts less than a 20% down payment
- There is no fixed percentage on private mortgage insurance premiums
- Many factors play into how much the private mortgage insurance premium will be
Here are some of the factors:
- Amount of down payment
- Type of property
- Credit scores
How Does Mortgage Insurance Work
The purpose of Private Mortgage Insurance is to protect lenders in the event if the borrower defaults:
- If property goes into foreclosure, the mortgage insurance company covers lenders on the loss
- Reason HUD requires FHA mortgage insurance premium is to insure lenders in the event borrowers default on their loans
- Without the borrower putting a substantial down payment, lenders are at risk in the event if the borrower were to default and the property goes into foreclosure
- Mortgage Insurance protects the lender from losses if the borrowers were to default on their loan
- For all Conventional Loans where the loan to value or LTV is greater than 80% LTV, mortgage insurance is required
- The cost of private mortgage insurance is paid by the borrowers
The monthly mortgage insurance is added to the borrower’s monthly mortgage loan payment.
How Does LPMI Work?
Many borrowers do not like the fact that they need to make an added payment to their monthly mortgage payment such as private mortgage insurance. Lender Paid Mortgage Insurance is an option conventional mortgage borrowers have. Lender Paid Mortgage Insurance has been created and launched to satisfy borrowers who do not want to make that extra additional monthly payment on top. of their regular monthly mortgage payment.
Lenders require private mortgage insurance from borrowers on conventional loans who do not have at least 20% equity. LPMI can cost quite a bit. The amount depends on the borrower’s credit and other factors. Lenders can pay the LMPI in one lump amount when the Conventional Loan closes.
Borrowers no longer need to worry about paying monthly private mortgage insurance premiums is they have LPMI.
Types Of Mortgage Insurance
What Is Lender Paid Mortgage Insurance? See below:
There are two types of Lender Paid Mortgage Insurance:
- The borrower can pay upfront lender paid mortgage insurance
- The one time upfront private mortgage insurance premium can be paid with sellers concessions
- The lender can give a lender credit and cover lender paid mortgage insurance
- This type of LPMI is covered by lenders
- Borrowers do not have to pay any monthly private mortgage insurance premium
- However, nothing is free in the mortgage world
- The lender pays for the monthly LPMI premium in lieu of a higher mortgage rate charged to the Conventional Loan borrower
Lender Paid Mortgage Insurance is available for borrowers with at least a 680 credit score.
Lender Paid Mortgage Insurance Versus Borrower Paid Mortgage Insurance
Benefits of lender-paid mortgage insurance versus borrower-paid mortgage insurance?
We have covered what LPMI is. Now, what is Borrower Paid Mortgage Insurance? This is what the borrower is:
- The borrower pays annual private mortgage insurance if the loan to value is greater than 80%
- Private mortgage insurance will terminate automatically once the loan to value of conventional loan hits 78% LTV
- Borrowers can request to remove the private mortgage insurance at 80% LTV
- Borrowers who feel that their homes appreciated substantially and have more than 20% equity, can request an appraisal
- If f they have sufficient equity, their private mortgage insurance will be removed
- A one time upfront private mortgage insurance premium is expensive
- It can be more than 2% of the loan amount
- Lender Paid Mortgage Insurance is not free and LPMI is offered in lieu of higher mortgage rates
Rates can be somewhat higher if the mortgage insurance is factored into the mortgage rates.
Understanding Borrower Paid Mortgage Insurance
Borrower paid mortgage insurance is like the annual FHA mortgage insurance premium:
- It is part of the borrower’s monthly mortgage payment
- The great news is that borrower-paid mortgage insurance is not required for the lifetime of the loan term like FHA Loans
- It can drop off when your mortgage loan gets down to 78% Loan To Value
There are a lot of variables on which private mortgage insurance plan is best for borrowers. Discuss it with a loan officer. See what is the best mortgage insurance program is best suited to you is depending on how long you are planning on keeping your home. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. We are experts in helping borrowers with the various private mortgage insurance options on conventional loans. We always look out for the best net tangible benefits for our clients.