Today’s Topic: Private Mortgage Insurance
We’re only talking about conventional (Fannie/Freddie) loans here. With these loans the PMI is provided by private companies. They have names like Radian and United Guarantee. These companies have their own guidelines that can sometimes slow down or stop a loan. You may have had a deal killed or a closing delayed by PMI underwriting. Some of the questions borrowers have about PMI:
- What is it? It provides protection for the lender in the event the loan defaults. It does nothing for the borrower.
- When does a loan have it? Conventional loans with a loan to value (LTV) of more than 80% will have PMI.
- How do I avoid it? Two ways 1) put 20% down 2) do combo loan – 80% first and then a 2nd loan for the difference. This was a very common thing prior to 2008. After that lots of lenders exited the second mortgage business and PMI rates became more competitive so today there is not as big a benefit but we still do them. One can also pay it one time but you didn’t really avoid it – you just pay it up front.
- How long does it stay on the loan?
- When you pay the loan down to 78% of the contract price it automatically comes off. If you call them at 80% they will take it off.
- If the home increases in value and you think your LTV is 80% then you can request removal. There is no guarantee they will remove it. They are not bound by any regs here.
- Can they keep the PMI in place past 78%? Yes – they don’t have to remove the PMI if:
- Borrower has late payments.
- Values in the market have decreased.
- The equity is subject is to a subordinate lien. (2nd)
- Home is no longer a primary residence.
- Gray Area? For as long as I’ve been in mortgage I’ve heard from other loan officers and PMI representatives that you cannot get the PMI removed in the first two years. This doesn’t appear to be anyone’s rule but I suspect it’s true. I also suspect that the sooner you try to get PMI removed the harder it is. With this in mind when someone plans on paying the loan down in the first months or years after the purchase I suggest they do a combo loan (1st and 2nd) then they can just pay off the 2nd any time and not haggle with their PMI company.
Info provide by Tom Davies
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Mortgage Loan Officer