Private Mortgage Insurance Requirements are necessary if you have insufficient funds to have a lower loan to value–
Everyone needs insurance for our life, our car, our house, our health, and yes, in some cases, even for our mortgage. This is the main focus today to explain what Mortgage Insurance Requirements(PMI) – Private Mortgage Insurance is. This mortgage industry term is used to describe insurance that protects the lender of your mortgage against any type of default. It is primarily used when you put down less than 20% of the purchase price of your home.
There is a lot of money touching hands within a mortgage loan transaction. It can be mind-consuming and bothersome. Especially when you do not quite understand all of the rules, and regulations and want to know how the money flows. What is the fuss and what are the mortgage insurance requirements(PMI) – Private Mortgage Insurance all about? Our main topic today is about conforming conventional loans. Meaning Freddie Mac and Fannie Mae loans primarily.
Applicants who do not have the 20% down payment must obtain the PMI policy. The higher the loan to value, the higher the mortgage insurance premium will be. However, the higher the down payment, % wise, the lower the premium.
How Does Mortgage Insurance Help Applicants
Mortgage insurance makes it possible for an applicant to buy a home without making a large down payment. Most lenders offer the products that Fannie Mae and Freddie Mac offer as they usually sell their loans to these agencies. At present, applicants can get a 97% loan to value, which is only a 3% down payment.
Not all applicants can afford a 20% down payment. This is how Mortgage Insurance can help first-time homebuyers, and those without lots of savings get a mortgage.
The insurance premiums are based upon the loan to value remaining after the down payment, the term of the loan, and credit.
Mortgage Insurance Protects The Lender
A private mortgage insurance company provides this insurance. The insurance is to protect the lender just in case there is a default. When the mortgage applicant has a 20% down payment, there is less liability for the lender. It gives the lender an advantage, as there is equity in the property, and is not as disastrous if the loan goes into litigation.
This insurance is to lessen the mortgage lender’s liability as borrowers can have an extenuating circumstance that causes a default.
How Is PMI Paid?
Usually, the applicant can add the mortgage insurance annual premium divided by 12 months into the loan payment and pay monthly. There are times when the premium may be financed into the loan.
Therefore, what is the best method of paying this mortgage insurance premium? Regardless of how you pay it, it will still make your payment more. Unless you have sufficient funds and can pay the lump sum payment out of pocket.
If you add the entire premium into the loan amount, you will increase the amount of the mortgage balance that your payment is based upon.
If you pay the premium in monthly installments, it is part of the PITI payment. The total PITI payment broken down- is the payment of, insurance, taxes, and interest. Therefore, the insurance includes your monthly hazard insurance plus your MI insurance monthly premium.
The Good News – How And When You Can Cancel The Mortgage Insurance
The good news about PMI is that for those who are required to obtain it, they will not need to keep it through the life of the loan. Typically, when you reach the point where you have paid down 20% of the loan amount, mortgage lenders will automatically discontinue the PMI insurance premiums. The mortgage regulations and laws dictate this benefit for the borrower.
We want to make sure you are aware that when you pay the mortgage down to an 80% loan to value, the loan is ready for PMI cancellation.
How can you get to this point expeditiously? It is quite simple when you think about it. Most people pay their mortgage loans online these days. It is as simple as adding $$$ payable to the principal amount of your mortgage when you pay your payment. You can make additional principal payments any time you choose to get your loan to value down to 80% as fast as you want to.
*Be aware if you have a prepayment penalty as restrictions may apply. However, our guides here are for those conforming loans, which have no prepayment penalty.
Mortgage Insurance (MIP) is required for FHA loans and you can get that information here.
VA Loans do not have mortgage insurance; however, they include a VA Funding Fee that is added to the loan amount. You can get that information here. You can also reference PMI @ CFPB
Hopefully, this will help you better understand the emphasis and need for private mortgage insurance requirements when your loan to value is greater than 80%.
