What is PMI? Get All the Facts Today

What is PMI? Get All the Facts Today

When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase a home with a down payment below 20%, you can never have too much information about Private Mortgage Insurance or PMI.

What is PMI?

Historically, the less a homeowner has invested in a property, the higher the chance the owner will walk away from it if payments fall behind. PMI protects lenders against the higher risk of low-down-payment loans by paying the losses if those loans go into default.

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:

“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.” 

According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 6%, while repeat buyers put down 14% (no doubt aided by the sale of their home). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.

Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:

The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Of course, the home owner will pay higher monthly payments to cover the cost of the PMI insurance. But the payment doesn’t last the life of the loan. Once a homeowner’s equity reaches 20%, PMI insurance can be cancelled, along with monthly PMI payment.

If you are currently paying PMI or if you’re thinking about buying ahome with less than a 20% down payment, the information in this report could save you thousands of dollars.

Your Legal Rights

The Homeowners Protection Act of 1998 stipulates that lenders must automatically cancel private mortgage insurance (PMI) once an owner’s home equity reaches 22%. The law will save many qualifying homeowners thousands of dollars each year by eliminating their PMI payments. But other qualifying homeowners will save even sooner.

Why? Because the savvy homeowner knows the law also requires a lender to cancel PMI at the 20% equity level if the homeowner makes a written request. Without a written request, the lender is allowed to continue charging PMI until the owner’s equity reaches 22% on the loan pay-down schedule.

Request vs Automatic

If you have reached 20% equity in your home through payments and market appreciation, then you can request to have PMI eliminated. This was always the case before 1998 law, but most homeowners didn’t know they had the option to do so. Now, however, the law requires lenders to send letters to homeowners, letting them know they’ve reached enough equity in their home from loan pay-down to cancel their PMI policy. But they are not required to send those letters until the equity reaches 22%.

Catch 22

For automatic PMI cancellation, lenders calculate equity using the amount of payments made and the original loan amount. Market value is not considered. To establish equity gained from appreciation, you must order (and pay for) a professional appraisal of the property’s worth.

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and to help you make the best decision for you and your family. Schedule your free no obligation consultation today!

And please, don’t forget to download

My Buyers’ Guide:

“Things to Consider When Buying a Home”

As a home buyer, there’s plenty you need to know. You’re about to make the largest financial investment of your life, but with my Home Buyers Guide, you’ll have the information you need about buying a home, right at your fingertips.

Here’s what you will find inside:

  • The Cost of Renting vs Buying
  • 2 Myths That Might be Holding You from Buying
  • Why Pre-Approval Should be Your First Step
  • What You Need to Know About Mortgage Process
  • What to Expect When Home Inspecting
  • And More!

The best part is, our Guide is free and available to download right now. All we need is your name and email, and we’ll send it directly to you.

Again… You Do Not Need 20% Down Payment to Buy Now!

Again… You Do Not Need 20% Down Payment to Buy Now!

A survey by Ipsos found that the American home buyers are still somewhat confused about what is required to qualify for a home mortgage loan in today’s housing market. There are two major misconceptions that I would like to address today: Down Payment and FICO® Scores.

1. Down Payment

The survey revealed that consumers overestimate the down payment funds needed to qualify for a home loan. According to the report, 40% of real estate buyers think a 20% down payment is always required. In actuality, there are many loans written with a down payment of 3% or less. For example, if you are a first time home buyer, with Federal Housing Administration or FHA loan, your down payment can be as low as 3.5% of the purchase price.

Many renters may actually be able to enter the housing market sooner than they ever imagined with new programs that have emerged allowing less cash out of pocket.


Also Read:

What is PMI? Get All the Facts Today.


2. FICO® Scores 

The survey also revealed that 62% of respondents believe they need excellent credit to buy a home, with 43% thinking a “good credit score” is over 780. In actuality, the average FICO® scores of approved conventional and FHA mortgages are much lower.

The average conventional loan closed in February had a credit score of 752, while FHA mortgages closed with a score of 686. The average across all loans closed in February was 720. The chart below shows the distribution of FICO® Scores for all loans approved in February.

 

In addition, to help make purchasing a home more affordable, The Virginia Housing Development Authority or VHDA, has rolled out a new Mortgage Credit Certificate program that gives Virginia’s qualified home buyers another option.

TO BE ELIGIBLE, BORROWERS MUST:

  • Be first-time buyers (waived in federally-targeted areas), or not have owned a home as a primary residence in the past three years.
  • Have income at or below VHDA’s maximum household income limit for the area.
  • Purchase a home below VHDA’s maximum sales price.
  • Use the home as their principal residence.

ADDITIONAL INFORMATION:

  • Credit is equal to 20 percent of the annual mortgage interest paid. Remaining  80 percent remains an eligible itemized deduction.
  • MCC is effective for the life of the mortgage, as long as the borrower continues to live in the home.
  • Borrower must have a federal tax liability. This is not a “refundable” tax credit. However, unused credit may be carried forward for up to three years.
  • Does not apply to state income tax.
  • MCC borrowers who sell their home in the first nine years of homeownership may be subject to federal recapture tax.

For the latest information, program updates and a list of participating lenders, check out vhda.com/mcc.

Bottom Line

If you are a prospective buyer who is ‘ready’ and ‘willing’ to act now, but are not sure if you are ‘able’ to, let’s sit down to help you understand your true options. Ready to talk? Schedule buyer consultation here.

And please, don’t forget to download

My Buyers’ Guide:

“Things to Consider When Buying a Home”

As a home buyer, there’s plenty you need to know. You’re about to make the largest financial investment of your life, but with my Home Buyers Guide, you’ll have the information you need about buying a home, right at your fingertips.

Here’s what you will find inside:

  • The Cost of Renting vs Buying
  • 2 Myths That Might be Holding You from Buying
  • Why Pre-Approval Should be Your First Step
  • What You Need to Know About Mortgage Process
  • What to Expect When Home Inspecting
  • And More!

The best part is, our Guide is free and available to download right now. All we need is your name and email, and we’ll send it directly to you.

 

You Can Save for a Down Payment Faster Than You Think

You Can Save for a Down Payment Faster Than You Think

In a study conducted by Builder.com, researchers determined that nationwide, it would take “nearly eight years” for a first-time buyer to save enough for a down payment on their dream home.

Depending on where you live, median rents, incomes and home prices all vary. By determining the percentage of income a renter spends on housing in each state, and the amount needed for a 10% down payment, they were able to establish how long (in years) it would take for an average resident to save.

According to the study, residents in South Dakota are able to save for a down payment the quickest in just under 3.5 years. Below is a map created using the data for each state:

What if you only needed to save 3%?

What if you were able to take advantage of one of the Freddie Mac or Fannie Mae 3% down programs? Suddenly saving for a down payment no longer takes 5 or 10 years, but becomes attainable in under two years in many states as shown in the map below.


Also Read:

Pre-Approval: First Step in Home Buying Process

 


 

Bottom Line:

Whether you have just started to save for a down payment, or have been for years, you may be closer to your dream home than you think! Let’s meet up so I can help you evaluate your ability to buy today.

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