Many buyers, especially first time buyers, do not have 20% down payment. Luckily there are a lot of mortgage loans offered with less than 20% down required. Besides VA, USDA, and FHA, there are conventional loans. For these Fannie Mae and Freddie Mac loans, private mortgage insurance (PMI) is required with less than 20% down. Most of the time when you hear someone say PMI , everyone cringes. At first, buyers want to avoid it if at all possible. Or we hear the question “What is PMI insurance?”. So first of all there are several benefits of PMI. Plus there are money saving PMI options when financing a home with a low down payment.
What is PMI Insurance?
The basic purpose of PMI for lenders is that it protects the mortgage company from a large loss in the case of foreclosure. It is an insurance policy covering the lender against loss. This is usually where most people’s definition stops. But PMI has a lot of benefits! The biggest advantage is borrowers can put down less than 20% of the purchase price. Additionally, borrowers can choose the type of PMI that fits buyer’s goals best. Furthermore, PMI may be removed or lowered as the mortgage balance decreases. Finally, the PMI company may offer homeownership or hardship counseling if the borrower needs it.
PMI Strategies for Fannie Mae or Freddie Mac Conventional Loans
Most think that PMI is just a monthly amount added to the mortgage payment. Surprise! There are other variations such as single premium up-front and split premium PMI. Part of our discussion with buyers involves explaining PMI options available. A buyer’s individual scenario and goals would determine which works best.
Split Premium PMI
The most popular form of a split premium PMI loan is FHA. This means that there is an up-front PMI fee plus a monthly amount added in the payment. An FHA loan has an up-front financed PMI in the amount of 1.75% of the loan amount. Plus it has a .85% (assuming over 95% financing on a 30 year loan and can be lower depending on term and LTV) monthly PMI amount.
Conventional Split Premium Alternative to FHA. If the borrower has a higher credit score, the buyer may qualify for lower premiums than FHA. For instance the up-front PMI portion may only be .50% versus 1.75%. Plus the monthly amount may be lower than FHA’s .85%. This strategy may be used on conventional loans with 3% down payment or more. Where FHA may work better at lower credit scores, a conventional split PMI option may win with higher scores.
Single Premium PMI
Single premium PMI is where a borrower is charged one amount up-front. Because of this one time mortgage insurance, it helps keep a mortgage payment lower. Where traditional monthly PMI adds to the mortgage payment, single premium PMI is a one and one fee. So more cost up-front, but a lower payment monthly. There are several ways a borrower may pay the single premium PMI.
Borrower Paid Single Premium. The borrower pays the PMI at closing in cash. But on a refinance, it may be included in the loan amount. Lender Paid Single Premium increases the rate a little so that the lender may pay part or all of the single premium. Financed Single Premium PMI allows a buyer to finance the fee on top of the loan amount. This option lowers the borrower out of pocket since the fee is financed into the loan.
So now you know what is PMI Insurance. Plus you know there are several PMI options often available to buyers. Keep in mind that Fannie Mae or Freddie Mac loans with PMI demand higher credit scores. Lower scores such as 640 would be more expensive than 740 for instance. We have several PMI companies at our disposal to give our borrowers the best options for financing loans with low down payment.