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How Private Mortgage Insurance Can Get You a Home Without a 20% Down Payment!
By John R. Blakefield
Private mortgage insurance is an additional fee that a lender may require if you do not put down the minimum down payment towards a house, usually around 20%. Does this mean that you can not get the house? No! A lender may option for you to get PMI (private mortgage insurance) which in the case of a defaulted loan, the insurer will pay the lender anywhere from 20-30% of the mortgage balance.
The lender will option for you to get a PMI if they want extra insurance that they will get at least most, if not all the money back that they borrowed. Even if they do lose out on some of the money that was originally borrowed by a home owner, they will have enough to cover costs that are associated with foreclosure and the resell of the property.
So if you can not afford the down payment that the lender expects, realize you have other options and that does not mean that this home is completely out of your range. The premiums for private mortgage insurance are usually less than adjustable rate mortgages and fixed rate mortgages. The premium for private mortgage insurance is based on the amount the home buyer is borrowing as well as the amount of down payment that the home buyer can afford.
For example, the less amount of money you can put down to satisfy the down payment, the more the private mortgage insurance premium would be. The premium may also be larger in neighborhoods or communities where the living expenses are much higher than average communities in the United States.
Because the home owner is expected to pay more money as insurance to the money being borrowed from the lender, there is a time that the PMI can be canceled and no longer will have to be paid. This will be decided by the lender, but usually cancellation of PMI can take place when the home owner has paid up to 80% of the property's purchase price or current market value. This 80% mark will based of whatever total is less: the purchase price or current market value.
The lender is responsible for putting in writing the fact that the home owner indeed has PMI and must be in contact annually of when the PMI can be cancelled. In order to protect the home owner from paying too much money as insurance, when mort of the value of the house is already paid for, the Homeowners Protection Act (HPA) established these private mortgage insurance policies.
In addition to the lender having responsibilities regarding PMI, the home owner must maintain timely payments, not to exceed 60 days late with a mortgage payment in two years, and 30 days late within one year. This protects the lender as well, so that the insurance is not cancelled if the home owner is too much of a risk, and may possibly default on the payments.
In order to cancel PMI, the lender will have to agree that the home owner has paid at least 80% of the purchase price or current market value. He or she can do this by having the property appraised and taking in to account an increase or decrease in value over the time that has elapsed. The HPA also requires that there be no other mortgage on it or a home equity loan. They basically want to see that you can continue with the monthly mortgage payments without defaulting. This way, the lender will get his or her money back as originally proposed.
The home owner does not get to choose the company that distributes the private mortgage insurance because it is protection for the lender. Therefore, the lender may choose the PMI company and you can not really change that. However, in order to avoid complications or fraud, always be apprised of the terms of the loan, what is required of the down payment, what are the minimums in order not to pay additional PMI payments, as well as the terms for cancellation. Work with only reputable lenders that are fully qualified and licensed professionals that have good references.
If you feel PMI is too much additional money to buy a specific house, you can always save more money for a down payment and then try again with a new property or the current one if still available. Only make financial decisions that are with in your comfort zone in order to avoid default payments, foreclosure, and other horrible incidents that occur when financial obligations are greater than one can meet.
About the Author
John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.
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