If you don’t have 20 percent for a down payment – don’t worry! The high cost of living combined with steep purchase prices proves a challenge for many Flagstaff homebuyers to avoid paying mortgage insurance.
What is mortgage Insurance? Mortgage insurance is simply an insurance policy that protects the lender if you default on your mortgage payments. There are two types of mortgage insurance: private mortgage insurance (PMI) and government issued mortgage insurance. The primary government mortgage insurer is the Federal Housing Administration (FHA) and on the primary mortgage insurance side, well, there are many: Radian, Genworth, MGIC, Essent, National, Triad, to name a few.
With an FHA loan, the mortgage insurance is a set factor based on the term of the loan, type of loan (purchase versus refinance), the loan to value along with the amount of the loan. FHA charges a portion of the mortgage insurance upfront as well as monthly. FHA does allow the borrower to finance the upfront portion in their loan amount instead of paying it in cash at closing. As of June 2013, all FHA loans will pay mortgage insurance for the life of the loan now – there is no way to remove it unless you refinance your loan out of FHA. However, if your loan started with a loan to value under 90 percent, you can eliminate the mortgage insurance after year 11.
Here in Northern Arizona, we have many properties that are eligible for USDA financing. USDA (United States Department of Agriculture) loans are only eligible in designated rural areas and they will allow for 100 percent financing. USDA loans require a “mortgage insurance policy” as well to protect the lender; however, USDA calls it a guarantee fee, not mortgage insurance. This mortgage insurance is a set factor for USDA on all loans. There is a portion charged upfront and financed into the actual loan amount and there is also a monthly fee as well. This guarantee fee can’t be eliminated; however, it does decrease as the mortgage is paid down.
For conventional loans, there are many more options for mortgage insurance. Here are some options a borrower might choose: pay monthly mortgage insurance, pay the entire mortgage insurance premium upfront in cash, the lender pays the single premium for mortgage insurance by charging a higher interest rate on the loan, pay part of the premium upfront in cash and part paid monthly.
Once the lender and borrower decide the option that is best for their scenario, the lender will request mortgage insurance from the PMI company. These companies base their premiums on similar criteria as FHA or USDA; however, the credit score of the borrower also factors into the premium amount with PMI. This can make a significant difference in monthly premiums for someone with average/poor credit versus someone with exceptional credit.
PMI can be cancelled on conventional loans, and here are a couple general guidelines.
- Borrower must have a good on time payment history with the lender (no 30 day or more late payments in the preceding 12 months, no 60 day or more lates in the preceding 24 months).
- Borrower must show 20 percent equity based on original appraised value or show 25 percent equity based on current value of the property after paying the mortgage for at least two years or show 20 percent equity based on current value of the property after paying the mortgage for at least five years. **Based on single family home, not a multi-unit property. FBN
By Julie Dedmon
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Julie Dedmon is a VP of Mortgage Lending with Guaranteed Rate in Flagstaff. Julie can be reached by email firstname.lastname@example.org, text or call 928-853-2727 or office phone 928-220-7767. You can also stay in touch by following her on Facebook, Twitter and Instagram. Julie’s office is located at 809 W Riordan Road, Suite 207, Flagstaff, AZ 86001. As a native of Flagstaff, she knows your market!
Julie Dedmon NMLS ID: 206773 AZ – 0936447 – 0907078
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