Private Mortgage Insurance (PMI) protects the lender in case you default on your loan. In most cases, unless you have a 20% down payment, you would have to pay PMI. But if that sounds like one more expense you can’t afford, here are some ways you can avoid PMI or get rid of it if you’re already paying for it.
The way PMI usually works is that you, the borrower, would have to pay an extra fee, along with your monthly mortgage. That extra fee can really squeeze your budget, especially if it’s already tight.
However, some lenders will offer to pay your PMI. Here’s how that works: They’d pay the full amount of the PMI up front, and you’d have to pay it back in the form of interest. It would slightly increase your mortgage rate, meaning that you’d have a higher monthly payment.
To figure out whether this is a good option for you, you’ll have to calculate whether the monthly cost of PMI would be more or less than the increase to your mortgage rate if your lender chooses to pay the PMI for you. Either way, the lender isn’t really paying it — you are. It’s just being distributed differently.
20% Down Payment on a Conventional Loan
The best, and most obvious, way to avoid PMI is to have a 20% down payment on a Conventional Loan. Since you’re putting down 20%, the lender wouldn’t need that extra protection against defaults. So you’d be in the clear.
However, if you couldn’t afford a 20% down payment and had to opt for an FHA Loan, for example, you could still get rid of your PMI once you reach 20% in home equity. Some types of loans have PMI attached to them for their entire lifespan, so in that case, you’d have to refinance to a Conventional Loan when you have 20% in home equity in order to drop the PMI.
If you are a veteran or are currently serving in the military, you are eligible for a VA Loan. The government created this loan program so that returning military members could purchase their own home with zero down payment, low monthly payments and more flexibility than traditional loans. The best part is, VA Loans require no PMI because the government provides a guaranty on the loan in case of default. So if you qualify, you can get a 15 or 30-year fixed VA Loan with zero down and no PMI.
The gift of equity
If you are purchasing your home from a family member, you can accept a gift of equity to lower the loan-to-value ratio. A gift of equity is when a family member sells you his or her house for a lower price than the listed price, and the difference can be used to make your down payment or pay off debt so you can qualify for the loan.
You can’t use a gift of equity on a VA Loan or Jumbo Loan. With an FHA Loan, you could also get a gift of equity from your in-laws or a non-profit organization. In any case, it must come with a letter that says it’s a gift.
For more information on avoiding PMI or getting rid of PMI on your existing loan, contact Riverbank Finance at (800) 555-2098 to schedule an appointment with one of our professional loan officers.
Great news for homebuyers considering an FHA home loan or FHA refinance! The popular mortgage program is getting even better. The Department of Housing & Urban Development announced this morning that the FHA will be decreasing their annual mortgage insurance premium by a quarter of a percent. The upfront guarantee fee will remain the same.
Effective for new mortgages closing on or after January 27th, the annual fee—paid monthly—will decrease from .85% to .60%. This news comes only four months after the USDA decision to lower their own upfront and annual fees on rural development loans.
New FHA MIP Savings Example
Now, unless you spend your spare time studying loan program guidelines, that might sound like gibberish—so let’s do some math to demonstrate the savings. On a $200,000 home purchase, the monthly mortgage insurance premium would decrease from $142 to $100. That is a savings of $42 per month, over $500 per year!
The FHA made this decision following four straight years of growth and $44 billion dollars of value gained since 2012. They aim to protect the insurance fund while also offsetting the cost of increased mortgage interest rates.
“After four straight years of growth and with sufficient reserves on hand to meet future claims, its time for FHA to pass along some modest savings to working families” -HUD Secretary, Julian Castro
Requirements for an FHA loan
You might be thinking, that’s great, but how do I know if an FHA loan is the right fit for me? I’m glad you asked! Qualifying for an FHA loan is relatively simple and provides many benefits, including but not limited to:
Have a specific scenario you’d like to run past us? Give us a call to speak with one of our licensed loan officers, or check out our FHA Mortgage Calculator. We would love to recommend the best loan program for you and your situation.
The Federal Housing Administration has announced that they will be reducing the mortgage insurance premiums (sometimes called PMI or MIP) charged on all FHA loans. The rate reduction will be nearly half the current costs cutting the insurance premiums down from 1.35% to .85% annually. This is great news for new home buyers and those that currently have FHA mortgage loans.
The History of the Federal Housing Administration (FHA)
The FHA program has been in place since 1934 when it was created to help spur home ownership in the United States. At the time, banks required very large down payments and strict mortgage terms which allowed very few to qualify to become homeowners. Since then it has insured mortgage loans for over 34 million home owners and remains a major loan program to consider.
What are the benefits of FHA Loans versus Conventional Loans?
FHA loan options typically have lower down payment requirements and more flexible guidelines than conventional financing. Many clients choose FHA financing for home purchases for benefits that can include as low as a 3.5% down payment, higher debt-to-income (DTI) ratios, home renovation options, lower mortgage rates and lower minimum credit standards as compared to conventional loans.
What do Lower Mortgage Insurance Premiums mean for New Home Buyers?
With the lower mortgage insurance premiums, home buyers will be able to save on their monthly payments. This monthly savings may allow them to qualify more easily or even qualify for a more expensive house for the same mortgage payment (FHA loan example).
With today’s low inventory of homes for sale, this may allow home buyers to expand their searches to find the home they have been waiting to purchase. Additionally, the lower mortgage insurance premiums may allow them to consider renovating a property or including upgrades into their financing through programs such as the FHA 203k renovation loan. The FHA 203k Streamline Renovation Mortgage may allow a home buyer to finance up to $35,000 in repairs for things such as new appliances, carpeting, flooring, paint, electrical fixtures and other upgrades to make a home their dream home.
What does Lower FHA Mortgage Insurance Mean for People that Have Recently Gotten a FHA Loan?
Those that have recently purchased a home with FHA financing or refinanced to a FHA loan, may be eligible to take advantage of the reduced insurance costs by refinancing their mortgage. Now is a great time to refinance due to the lowest rates in nearly 2 years as well as the lowered insurances costs.
If you have paid at least 6 mortgage payments on your FHA loan you may qualify for a FHA Streamline Refinance. This FHA refinance program allows a homeowner to refinance their FHA loan to a new FHA loan with a lower rate. The FHA Streamline Refinance Mortgage typically has no costs, no application fees, no appraisal and no income documentation.
How Do I Qualify for a FHA Streamline Refinance Mortgage?
Qualifying for a FHA streamline refinance is as easy as paying your mortgage payments on time. Once you have paid a minimum of 6 mortgage payments on your FHA loan and you can save at least 5% off your mortgage payments you may be eligible for a FHA Streamline refinance loan.
How much will the Lower Mortgage Insurance Costs Really Save on a FHA loan?
To show the savings on the FHA mortgage insurance it may be best to take a look at an example FHA loan scenario. Let us make the following assumptions:
Loan Purpose: Home Purchase Loan Type: FHA 30 Year Fixed Purchase Price: $250,000 Down Payment: 3.5% ($8,750) Interest Rate: 3.50% Base Loan Amount: $241,250 Annual Property Taxes: $2,400 Annual Home Insurance: $900
Principal & Interest
Total Mortgage Payment
In the above illustration of reduced FHA PMI, the home buyer would save $100.52 per month on their mortgage payments. Over the life of their loan that would give them a total savings up to $36,187.20 (if they kept their loan for the full term). This is a savings of over 6% which would be the equivalent of $15,000 more purchasing power for the same payment or a home purchase price of $265,000 vs $250,000.
When do the lower FHA Mortgage Insurance Premiums start?
FHA case numbers starting Monday January 26th, 2015
The FHA will begin issuing new FHA case numbers starting Monday January 26th, 2015. From that date forward any new FHA loans started will be allowed to take advantage of the lower mortgage insurance costs.
2015 FHA Mortgage Insurance Premiums Chart
What if I am currently in the process of getting a FHA loan? Can I still get the lower rates?
Yes. You may be able to get the reduced MIP if you have not yet closed and funded your loan. Speak with your loan officer about requesting a cancellation of your current FHA case number and ask them to request a new FHA case number on or after January 26th, 2015.
What is the Minimum Credit Score for FHA Loan Financing?
Each bank and lender sets their minimum required credit score for FHA financing. While most banks and lenders set the minimum credit score at 640 and up, some lender allow for credit scores much lower. For example as of 1/26/2015 Riverbank Finance LLC will allow credit scores as low as 560 with a 10% down payment and 580 with only a 3.5% down payment for FHA loans in Michigan.
How Do I Apply for a FHA Mortgage Loan?
The Federal Housing Administration does not directly lend money. They insurance banks and lenders against losses which allow them to lend with eased guidelines. Applying for a FHA loan can be done by speaking with a licensed loan officer at 800-555-2098 or click here to apply for a FHA Loan.
Where can I Find More Information the Reduced FHA MIP?
Disclaimer: Riverbank Finance LLC is neither a government organization nor part of FHA or HUD. Rates, terms, fees, and programs given above are examples for illustration purposes only. This is not a commitment to lend. Not all will qualify.
FHA loan are becoming more popular as families deal with the after effects of the major economic depression that we saw only a few years ago. With conventional mortgage being more difficult to qualify for with previous credit issue, FHA has become the go to mortgage program for U.S. Families.
The Federal Housing Administration has experienced high delinquency rates throughout the past couple of years also. With the uptick in foreclosures and partial claim premiums from buyers not able to pay their payments on time, the administration is forced to again raise mortgage insurance premiums.
The Federal Housing Administration (FHA) does not offer financing directly. Their role in mortgage lending is to insure private companies against losses. When a bank or mortgage company offer FHA financing they are using the administrations underwriting guidelines to pre-qualify and approve clients. If the borrower qualifies under such guidelines then the FHA will insure the lender against losses.
With billions of dollars of mortgage loans insured the FHA has a large responsibility to remain solvent and protect itself against future losses therefore it has an account called the Mutual Mortgage Insurance (MMI) fund. This fund is regulated by law and the FHA is required to maintain a 2% minimum reserve.
The FHA has dropped below their minimum requirements therefore they turn to new borrowers to cough up the coins to replenish it. The Federal Housing Administration has announced that it will be increasing Mortgage Insurance Premiums in the near future.
2013 Mortgage Insurance Premiums for FHA Loans
Starting April 1st, 2013, FHA mortgage insurance premiums (MIP) will increase 10 basis points annually of .10 percentage points. This increase in premiums will apply to all FHA loan terms including the 15-year-fixed-rate FHA loans.
FHA Streamline Refinance MIP
If your current loan is an FHA loan in which you took out prior to June 1st, 2009 then you may be in luck. The administration has allowed a lower premium amount for homeowners refinancing to lower their payments through a FHA streamline refinance mortgage.
FHA Streamline Refinance Mortgage insurance premiums will remain at.55 basis points or .0055 percentage points annually. The added bonus is that the up-front mortgage insurance premium will be only .01 basis points or .0001 percentage points.
Updates for Cancelling FHA Mortgage Insurance Premiums
Starting June 3rd, 2013 the FHA has announced that it will no longer allow MIP cancellation if the loan balance is higher than 90% of the home’s appraised value (>90% LTV). Currently homeowners are able to request cancellation of their monthly mortgage insurance once their loan balance reaches 78 percent of the home’s original appraised value when the loan was taken out.
For those homeowners whom are disciplined enough to have a 10% down payment and start of at 90% LTV or less, the mortgage insurance will continue for a minimum of 11 years. This chance starts mid-2013 and will have sweeping effects to the mortgage industry
How to Apply for an FHA mortgage
Despite the additional mortgage insurance premiums , FHA mortgage loans may still be the best option for a home purchase or refinance. Conventional loans still require a minimum of 7 years to have passed after a foreclosures while FHA may allow only 3 years after the sale date. This factor alone still has clients flocking towards FHA loans.
To check your FHA eligibility, and how the agency’s new rules may affect your finances, get started with a rate quote online or by calling the mortgage experts at Riverbank Finance today. If you get started before the April 1, 2013 deadline, you’ll be “grandfathered” in to the current, lower MIP rates.
Unfortunately, FHA has recently announced some change to the FHA mortgage insurance premiums for all new FHA loans starting April 1, 2013. It just seems as if FHA continues to raise the mortgage insurance premiums to try to get it back in line so the program remains self funding. Unfortunately, the reason behind these changes are because current homeowners are defaulting on their payment and not paying their FHA premiums that are already due. FHA will continually keep checking the overall strength of this great program. Starting April 1st homeowners will pay 1.55% for all upfront mortgage insurance.
Streamline your FHA loan to reduced premiums amounts if you obtained your mortgage prior to June 1, 2009
One thing that is not going up is the FHA streamline refinance loans as long as you loan originated before June 1st 2009. If your FHA loan originated prior to June 1st 2009 you will get a break on your mortgage insurance premiums.
Here is a chart which helps explain the mortgage insurance premiums:
15-year fixed rate mortgage with LTV of 78% or less: No annual MIP required.
15-year fixed rate mortgage with LTV greater than 78%: .55% annual MIP
30- year fixed rate mortgage, all LTVs: .55% annual MIP
It’s time to beat the April 1st deadline
If your loan is already in process the chances are good that you will be lovked into the old FHA mortgage insurance premiums. It is very important to hurry up and beat these changes so you will not need to spend out unnecessary money which could be avoided. Contact Riverbank Finance today to lock in your FHA loan or FHA Streamline Refinance MIP before the premiums change!