Understanding Mortgage Insurance and the different types
The keys to home ownership can be tricky and confusing, unless handled by a true professional loan officer. You’ll sometimes hear loan officers and or realtors talk about one mortgage program over the other, telling you how great it is or that the monthly mortgage insurance is less than the other program. But wait, one main ingredient is still missing in this whole equation. What are the credit scores, aka fico scores. Why is this important?
When comparing a conventional loan to any other type of mortgage loan, many of the MI companies (mortgage insurance) will have certain restrictions when it comes to credit scores, the percentage of the down payment, and area restrictions.
Let’s quickly look at the four major types of mortgages.
Conventional Loans – If you have less than 20 percent down, you are required to have some sort of mortgage insurance. The standard mortgage insurance is called monthly mortgage insurance. There are such programs called LPMI (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). ps.. Mortgage Insurance doesn't always fall off when you hit 78% LTV (loan-to-value). Specific guidelines must be met still.
FHA loans – You have upfront mortgage insurance and monthly mortgage insurance. No matter if you have 20 percent or more down, you are still required to have monthly mortgage insurance. Depending on your credit scores, even with 20 percent down, a FHA loan still might be your better option. FHA raised it’s mortgage insurance as of April 18th,2011. New FHA mortgage insurance – Reminder – If you do put 20 percent down, the mortgage insurance falls off in 5 years.
USDA Loans – As it stands, there is no monthly mortgage insurance. But this will change come October 1st, 2011. New USDA monthly mortgage insurance.
VA Loans – There is no monthly mortgage insurance.
Summary of mortgage programs : Three of the major types of mortgages mentioned above, FHA loans, USDA loans, and VA loans, all have some sort of upfront mortgage insurance. Each one has a different name for it.
Here is a comment that I just heard the other day.
“The FHA Premium Rate Increase Makes conventional MI a Better Option for Many Borrowers.”
To me, this is a blanket statement, and a huge reason why so many people get put into the wrong types of mortgages. Sometimes the basic reason was because it was just easier for the loan officer and not what was better for the borrower. Mortgage Insurance guidelines change, but as of right now, you typically need a 680 credit score of better when putting 5 percent down. Many MI companies want a 700 credit score. When you hear about these special MI programs such as BPMI, you need a 700 or 720 credit score.
Summary :
When it comes to conventional mortgage insurance, not only do you need specific credit scores that have to be higher, but the loan gets underwritten again by the MI company. When it comes to FHA loans, it’s a one time thing. Again, you need a professional loan officer that understands these differences and who will dissect the different types. It might seem easy to some, but if not done correctly, it can be a long and confusing process.
The bottom line, just be careful of what you hear out on the street. Blanket statements could be expensive.
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For more information on FHA loans, please go to this link. The FHA Expert
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc
Mortgage insurance, PMI, MIP, VA Funding Fee, all types of subtle and insidious increases in fees have added seriously to monthly payments and seriously impacted the buyer's ratios.
I see no relief in sight. In fact, I've seen cases where a buyer actually had to consider buying in a lower priced area to qualify. Unfortunately, it wasn't where they wanted to love and they decided to continue renting.
Hey, great job. Looks like your sabbatical from blogging worked. I'll come back later and say more.
In the meantime, there is one more type of mortgage insurance we run into on short sales. The investor can buy insurance on a securitized pool or an individual policy. The homeowner never knows about it because he didn't contract for it, it's paid for by the investor (eg Fannie). The beneficiary is the investor. It is typically for about 30% of the total value of the note. It's to cover future losses. When you get into a short sale you can find out that despite the fact that the homeowner has a conventional note that he put 20% down on, he has mortgage insurance that needs the first step of OK in getting a short approved.
Thanks for the education. I "knew" this but didn't "KNOW" it. Debby
Jeff. This is a wonderful explanation ..Great job and congrats on your featured post
Helpfulhannah
Jeff - Good job, good info on the links. It's hard to keep up with the changes, and the dates you gave only mean that more changes are coming.
Kenneth
I have been searching for the longest time for A comprehensive answer to what mortgage insurance is all about. This is not even close to what I thought it was Jeff...
Thanks for posting this. I think there's a misunderstanding about MI in general.
hey this was great information here. thanks for sharing.
Great info...glad your putting this out..not many people know this
We always think we know it all - and believe me, at least I don't - that's where the value of a good associate lies.
Q: About FHA PMI dropping of after 5 years, is it alway true irrespective of LTV at that time?
LENN.... . well, I will agree that the raising of some of the mortgage insurance's for specific loans have hurt buyers... VA loans have been holding steady. I know I just tried working on a FHA refinance, lowering the rate by 3/4% on a 280k loan and the payment was only reduced to $14 a month, because of the new FHA monthly mortgage increases. In a case like that, the person should get the older version if they have made their payments on time ...
LESLIE.... . I didn't know any of that regarding short sales... thanks for sharing and thanks for the compliment.. and yes, stop on back.
DEBBY... . my pleasure, I am glad that I could help out with the basics...
HANNAH... . thanks for the kind words and for the compliment.
KENNETH... . if any of the mortgage changes are the hardest to keep up with, it would be regarding the MI changes and guidelines. And thanks for the compliments...
PAUL... . well, I am glad that this helped some.. I could have added some more detail, but then many would be lost. Just wanted to give a quick oversight... thanks
ADAM... . I totally agree, hence why I wanted to write about it...
STAN... . my pleasure and thanks for the compliment..
CORY... . after reading many comments like the one I posted in this article, I had to write about it... so thanks and thanks for the compliment..
PRAFUL... . sorry if that part was a little confusing.... if you put 20% or more down, it will fall off in 5 years and it doesn't matter what the value of your home is at that time. But if you tried to refinance later on, no matter the LTV, you will have mortgage insurance again. thanks for asking...
Jeff: Thanks for the clarification. I'm curious what you're seeing FHA vs. conventional. Obviously, there's blood in the water with FHA effectively doubling their monthly MI premium. Are you seeing conventional being more competitive now comparing apples to apples?
Jeff, this was already featured prior to me. Great job. The bottom line is that there's so many variables to each....it's not just 4 categories anymore....THAT A BUYER NEEDS A PROFESSIONAL....not some bank employee collecting docs!
great post
thanks for the info and thanks for sharing
great to have
cheers
v
Jeff, Now that you have done such a good job covering the Monthly Mortgage Insurance fees, are you going to write another blog on the Upfront MI, Funding Fee costs and how they apply?
I think an important issue your bought out is a good loan officer will find the best fit for a buyer.
PAUL... . to answer your question, only if you have high credit scores and put 10% or more down. I will be doing a series of FHA vs conventional posts with different down payment amounts and credit scores... but this can be tough, because as I mentioned, conventional mortgage insurance might not be allowed depending on where the property is located. Well, allowed, but that it would have higher restrictions... it just gets so detailed... thanks
LARRY... . thanks buddy for the compliment. Yes, there is just so much to think about and look at when it comes to mortgage insurance. As you and I stated, so many variables.
VINCE... . my pleasure and thanks for stopping by & for the compliment.
STEVEN... . well, thanks for the compliment, I think... lol Seriously, I find this stuff boring and hate writing about it... I guess I could have made this a 3 part series, because mortgage insurance alone, there is more to talk about.. such as when it falls off, the different types... and as you pointed out, the upfront stuff, or the VA or USDA mortgage insurance that gets dumped on top. I guess I will have to do a series now.. thanks
JERRY.... . I think that was one of the main problems from 2002 to 2006, that many loan officers gave out loans that were easy for them and not what was best for the borrower. I know this for a fact from listening to some in the past and from talking to some... thanks
Very well written post - I look forward to going back and reading the rest of the series.
Hey Jeff!
Thanks for the 411... How about a future post on some of the requirements on conventional MI not necessarily being dismissed after LTV ratios are reached? Mostly credit scores at that point or more to it?
Thanks again!
Jeff, i can not get enough of this information on the MI as it changes so much now & i need to keep absorbing it....ALso, thank you Leslie for that comment on the MI with short sales...i just ran into it for the first time & my seller was going ballistic 'cause she said she had no MI...well guess what the Investor did...
Dang, Belonger! Another gold star! I'll never get a chance to include you in my little summary. Good information, though!
Jeff - This is really important information for people buying homes and underscores why they need a knowledgeable mortgage professional.
MAYA aka Long Beach... . I hope the other links help some or to help educate your borrowers. And thanks for the polite compliment.
BRIAN.... . to be honest, the details to what you mentioned have changed some and I would need to dig into it... and it's truly a boring topic for me.. lol Seriously though, I have thought about it. But I am a little confused on what you would want. Details on how MI falls off? Or not that and more details on the special requirements on the different levels of MI with the credit scores? Because if the second, the problem with that is many of the MI companies are different... and, it would also come down to the location of the property. Even if I gave the specifics, if it was in an area that had extra restrictions, that would reduce your LTV.... in any case, thanks for the polite comment and for asking... would like to hear more of your feedback on what you would like. thanks
GINNY... . I agree 110%.... it can be hard to keep on top of, even as a loan professional. And yes, thanks to Leslie on her info...
PAT... . yea, 2 for 2 since being back... I need to write a bad one tomorrow. ;o) Seriously, it's nice when my posts get recognized. But no way I get 3 in a row, so you can use the one I do tomorrow. ;o) thanks
CHRISTINE.... . I think it's extremely important info, especially when so many make conventional MI appear cheaper, which in many cases, it is... but in some cases it requires more money down or much higher credit scores. And that just doesn't fit the average home buyer. Thanks
I wrote a similar post a few weeks ago. I think this is such an imporant topic and many do not know anything about mortgage insurance.
Thank you so much for a comprehensive discussion of a very misunderstood concept. Appreciate your time and effort to get the right word out on the "street".
Jeff - Good information to remember. I like the series.
Melissa, Gayle, and Robert.... thanks for stopping by...
Paul, comment #13... here is a quick comparison that I just did regarding FHA loans vs Conventional loans. This is based on using standard MI for conventional loans. As you can see, even with 5% down, as long as your credit score is under 700, FHA in my opinion is still better and cheaper. thanks
Jeff - This is another one of those great posts that you write! I have chosen to reblog this one as well! Thanks!
Jeff, nice summary and once again you show how every home purchase has different criteria to meet, Thanks for the post very informative.