General conventional loans require 20% of the selling price as a down payment. This is often the largest hurdle for many potential home buyers. In order to make buying a home more affordable, lenders devised a solution to allow for smaller down payments and still minimize their own risk – private mortgage insurance.
Borrowers with less than 20% for a down payment may be required to apply for private mortgage insurance. The PMI company then insures the lender, generally for the top 20% of the mortgage, in case of borrower default. The amount that the borrower is required to pay for PMI depends on the type of loan, the loan-to-value ratio, and the insurer. However, it is the lender, not the borrower, that shops for the PMI company and program, so there are some important questions to ask lenders about PMI.
· How many company’s PMI programs will be considered?
· How does the selected policy compare to others in the marketplace in its:
– Insured loan-to-value ratio
– Procedure for requesting removal of PMI
The PMI company will consider your application with many of the same guidelines as the lender, namely your credit, employment, and reserves. Additionally, they will consider the property being purchased and such questions as:
· Does the loan have a “teaser” rate which will increase payments in the future?
· To what financial degree is the seller contributing?
· How stable is the borrower’s employment?
· Is the economy of the area stable?
· How is the neighborhood where the property is located?
Luckily, for conventional loans, PMI is not something that must paid for the life of the loan. For loans originated after July 29, 1999, once the borrower has reached 22% equity and payments are current, the federal government requires that the lender remove the PMI. The borrower can petition the lender to remove the PMI at any time. This usually will require documentation of an appraisal and sufficient and timely payments. Be aware of which appraisers are approved by your lender – lenders can choose not to accept the appraisal if it was not done according to the lender’s guidelines.