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What is Private Mortgage Insurance (PMI) and How Can I Avoid It?


 
Private Mortgage Insurance AKA PMI, is an insurance policy which protects the issuer of a home loan against default by the borrower. It is typically required on home loans in which the down payment is less than 20% of the appraised value of the property which secures the loan. The exception here is FHA loans which require a similar type of mortgage insurance. FHA loans require a mortgage insurance premium that is issued through the Mutual Mortgage Insurance Fund therefore, this is not “Private Mortgage Insurance” in the strict sense of the word. Additionally, FHA requires two types of premium. Upfront Mortgage Insurance Premium and an Annual Mortgage Insurance Premium which is divided into twelve monthly payments.  In most cases, FHA loans require Mortgage Insurance regardless of the amount of down payment. For a full matrix and explanation of the different scenarios, you can view and download the official document, called a Mortgagee Letter, here.
 
How is PMI Typically Calculated?
Private Mortgage Insurance is calculated based on a few factors which determine the level of risk to be insured. The primary elements that impact the cost of PMI are as follows:

Loan To Value ratio
Applicant’s Credit Score
Type of Property
Type of Loan

There are other factors which influence the rate and how it is paid. There is borrower-paid mortgage insurance as well as lender-paid mortgage insurance. The latter is basically built into the mortgage rate, which has some advantages. There are also options on how you pay your mortgage insurance. Single upfront premium or monthly payments. In addition, there are loan programs and lender variations on coverage requirement. For instance, one loan program with a lender may require 12% mortgage insurance coverage, a similar program with another lender may require 18% coverage. The rates on those two variations will have a variance in rate and payment.
 
As you can see the subject of mortgage insurance, as is the case for all types of insurance, is not simple or easy. If you truly want to find out an exact scenario for your case, contact a qualified lender who can guide you through the process and your options. If you’d like to do your own due diligence and get familiarized with the intricacies of PMI, you can visit one of the largest mortgage insurers online, MGIC. They have an extensive library of educational resources.
 
Let’s look at a real-world example so that at least you can have some idea of how PMI is calculated: 
Let’s say you are purchasing a home priced at $250,000 and you only have 10% down or $25,000. Based on the most common type of mortgage insurance offerings,  and based on MGIC rates. For a fixed rate mortgage with a FICO score of 760 or above, standard Fannie Mae loan, the monthly payment would be based on a rate of .28% and would be $53 per month.
 
How Can I Avoid Paying PMI?
Don’t want to pay Mortgage Insurance? There are some options available.  There are ways to structure a loan as well as some types of loans that don’t require mortgage insurance. One of the simplest ways to avoid PMI, of course, is to come up with 20% down and get a conventional loan. If you are unable to do that, let’s explore some ideas to fund that additional 10% down payment:
 

Tap into your retirement plan. Retirement plans such as 401Ks allow you to borrow against the balance of your account. Withdraw enough to complete the 20% down. Yes, you will have to make payments on that retirement plan loan however, the payment will be smaller and you will be paying yourself the interest, adding to your retirement account balance along the way.

 

Get a gift. If you have family who can gift you the balance of the 20% downpayment, you can avoid PMI and gifts don’t have to be paid back.

 

Structure your loan as an 80-10-10 AKA PiggyBack loan. This is a very practical option for borrowers with great credit. You will need a FICO score of at least 760 in most cases, however, check with your lending professional as you may be able to find programs available with lower FICO scores.

 

Have you served in the military? A VA loan may be the perfect loan. VA loans do not require monthly mortgage insurance although there is a “VA Guaranty Fee” which is a form of insurance. This is normally financed into the loan and in some cases, you may be exempt if you have a service-related disability.

 

Physician Loans. If you are a medical doctor, you may be able to qualify for special financing for doctors. These loans require no down payment AND do not carry the burden of PMI either. Although rates may be slightly higher, this may still be a great option for you.

 

Credit Union Loans. Check with your credit union. A small number of these offer mortgages with no PMI.

 
When Can I Stop Paying PMI On My Mortgage?
The question everyone with PMI wants an answer to; How can I get rid of PMI?! The answer is not so simple if you consider all the different types of loans with PMI someone could have. Let’s take a look at the various loans which carry PMI and how a borrower may be able to cancel it, or find another way to get out of it.

PMI on conventional loans- In most cases, you can get rid of PMI on a conventional loan once the Loan To Value Ratio reaches 80% or below based on the current value of the property. Typically,  the borrower has to get an appraisal and request that it be removed. The one caveat is; Many MI insurance policies, especially those that are monthly premium payment, have a minimum period during which the borrower has to have a policy in place and be paying for it. Check your particular MI policy.  In most cases, borrowers who pay down the principal balance to 78% OF THE ORIGINAL appraised value at acquisition time, will have the PMI automatically removed by the servicer. Most of the time you don’t even have to request it, servicing departments can easily figure out when the borrower will reach that LTV based on the payment schedule, an alert gets put in place and it will trigger at the appropriate time.

 

Mortgage Insurance on FHA Loans – Figuring out when you can, or even if the loan is eligible to have Mortgage Insurance removed, depends on a few factors. The three primary elements that determine whether or when you can eliminate the insurance are; When the FHA case # for the subject loan was issued and the term of the loan in years. Additionally, the initial Loan To Value ratio also plays a part in this matter. For a full matrix, you can view this detailed explanation on the subject.

 

The one solution to get rid of any type of Mortgage Insurance – The long and short of it: Refinance. Plain and simple, if you have the equity to refinance out of FHA or a conventional loan where you are still paying PMI, just refinance the loan and get a no PMI loan.

 
Is PMI Tax Deductible?
Another hot topic is the deductibility of mortgage insurance premiums on your income tax return. As of 2019 and the foreseeable future, for loans originated on or after December 15th, 2017 the deduction of premiums has been reduced to loans up to $750,000 for single taxpayers and those who are married and filing a joint return. $375,000 for those who are married and filing separately. Consult your tax preparer for full details. Taxpayers with loans originated before Dec. 15, 2017 can still take advantage of the deduction on mortgages up to $1M (One Million Dollars).
 
Summing it all up
Some would say that PMI is a “necessary evil” which some home buyers have to endure. The reality is; Mortgage Insurance provides a way for those who want to become homeowners, to do so even if they lack the hefty 20% down payment and have no other choice such as a VA loan. It is a perfectly acceptable vehicle to use to invest in that first home so you can get your foot in the door. The great news is, there are multiple ways you can get rid of it once you have gained some equity.
 
At Streamline Mortgage Solutions, we have experienced and knowledgeable mortgage professionals who will explore all your options for mortgage insurance premiums and rates as they vary. You can call us at 407-898-4477 or email us at BZIMEL@STREAMLINEFLORIDA.COM.
 

Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference?

Buying a home can be a big undertaking. For many,
it is one of the most important financial decisions of their lives. A lot of
money is needed to purchase a property, and the majority of buyers can’t do it
with just their cash reserves alone.

This is where a mortgage loan comes into play. For obvious reasons, not everyone can get a mortgage for the home they would like to purchase. Your mortgage lender, your seller, the listing agent, your agent, and also you are all going to want to make sure that you have the financial stability to afford the mortgage and thus the home.

If it turns out that you won’t qualify for the
necessary mortgage, that is something you are going to want to know as soon as
possible. Otherwise, you will simply end up exhausting a lot of time and energy
with nothing to show for it in the end.

This is where pre-qualifications and pre-approvals come into play. They help show everyone, including yourself, that you are in good enough financial standing to afford the property with a loan. Even though these two processes aim to accomplish similar goals, they vary in depth and standing.

Let’s review what they actually are and how they differ.

What is Mortgage Pre-Qualification?

If your plan is to finance your future home with a mortgage as opposed to cash, you are most likely going to need to first get pre-qualified. A mortgage pre-qualification is a pain-free, first step toward determining whether you fit the criteria for a home loan.

A pre-qualification can be granted in a relatively short amount of time, often times it takes one to three days or less. Additionally, it’s an affordable process at little or no cost. A mortgage pre-qualification is used to show a mortgage lender what you can afford.

The pre-qualification will take into account
factors including:

Basic financesDebt-to-income ratioDown paymentAssumed credit scoreEmployment historyAssets

A pre-qualification is based on estimates and what you tell your lender about your financial situation. It’s an informal, nonbinding evaluation, and your actual credit score generally isn’t even pulled during this part of the process. If the information you provide is inaccurate, those discrepancies will come up during the pre-approval process when verification comes into play. This is one of the reasons why the pre-qualification is typically seen as less effective to sellers than the mortgage pre-approval.

It is recommended that you pull your own credit report from a free website early on in the home-buying process. That way, you have a better understanding of where your credit lies. Retrieving your report this way will not actually hurt your score but getting it pulled by a lender will.

Mortgage pre-qualification does not have the same power as a pre-approval. However, it is a useful way to know what kind of loans you are likely to qualify for.

What is Mortgage Pre-Approval?

A mortgage pre-approval is a much more substantial
document. This is a written and conditional commitment from either a mortgage
lender or a bank. It’s function is to confirm you have been pre-approved for
the financing of the mortgage.

You can only obtain this after completing a loan
application and supplying verified documentation. These pertain to your assets,
employment, and income. In addition to those documents, you will also need
running credit. The loan file will have to be underwritten based on the current
rates for mortgages.

From this information, lenders will have the data
needed to calculate your debt-to-income ratio. From there, they can extrapolate
what you can actually afford.

Getting pre-approved not only shows what is
actually in your price range. It also proves to the seller that you are a
committed buyer and are taking the process seriously.

To be clear, to be pre-approved for a mortgage,
you will need to supply:

A credit reportPay stubsTax returnsBank statements

For the pre-approval process, a lender will often do a credit check. This means a hard inquiry on your credit report. Be careful during this part of the process because a hard pull can impact your credit score.

If you end up shopping around with different lenders, beware, as this can mean multiple hard pulls and multiple points taken from your score. Credit organizations understand that this sort of thing happens. As such, they usually allow multiple pulls to occur within a limited time frame (often just a couple of weeks). They will just have all of those pulls count as one.

These hard pulls remain on your credit for two
years. In that timeframe, lenders will have the ability to see that you have
been shopping around after looking at your credit report. Sympathetic lenders
may take this into consideration when reviewing your score and history.

Also, be aware that some lenders charge an application fee for the pre-approval, which can end up costing you several hundred dollars.

It is important to note that a pre-approval is
usually good for 60-90 days. It is conditionally based on the information in
your file. If that information changes or new material comes up, your status of
approval may change as well.

We must stress that a pre-approval is not the same as an approval. It does not guarantee that you will receive financing. Even an approval is conditional to you being able to fulfill all of the requirements set forth by the lender.

How Necessary Is a Mortgage Pre-Approval for Buying a Home?

There is no law that states you absolutely need to
have a mortgage pre-approval letter in order to buy a home, but houses go
quickly nowadays and multiple bids are the norm. With these factors in mind, it
is likely that you will not even hear back from the seller without the letter.

By getting pre-approved, you and your seller can
both feel better. It’s an assurance that you have the necessary financial
status to go through with the financing.

Part of this process has been sped up by modern
computers and software, which can process automatically and at lightning
speeds. As such, the actual work involved with pre-approving is light. It is
even possible to get yourself pre-approved in just a day.

We would also like to note that you are not
required to finance with the lender who pre-approves you. In fact, you can use
your mortgage pre-approval letter as leverage to get a better deal with a
different institution.

Be aware that some lenders use mortgage pre-approval and mortgage pre-qualification interchangeably. These two processes are not the same thing. You should make sure that your lender clarifies what the process entails. It can also be helpful to confer with your real estate agent to get a sense of how important each of these documents are in your market.

What Happens After Pre-Approval?

Congratulations on your mortgage pre-approval!
Now, you get to move on to the process of applying for a loan.

As previously stated, you can complete the loan application with the lender who pre-approved you or with a different party. You are not obligated to any specific lender or bank.

After you have picked your lender, you will have to fill out disclosure paperwork and confirm that you intend to continue with the loan application. Determine how much money you want to put toward your downpayment, which will factor into whether you are required to pay for things like private mortgage insurance. After this step, your lender will gather all of the necessary documents – which include the purchase contract and its particulars – so that they can process your loan.

From your lender, it will then go to an underwriter for their approval. This is where the conditions will be written so that the loan can be funded. They will also give you the chance to lock your loan during these early stages. If you choose to lock it in, it will ensure that the quoted interest rates will not change.

How We Can Help You

There are a fair number of differences between
mortgage pre-qualification and mortgage pre-approval. But, as we can clearly
see, the main difference lies within the fact that a mortgage pre-qualification
(or pre-qual as they say in the industry) is merely a good first step. It is
not nearly as robust as a pre-approval.

It is helpful to have both a pre-qualification and
pre-approval. This will allow you to know what kinds of properties you can
actually afford. It also allows you to act quickly when you find the home that
is most ideal for you.

Here at Streamline Mortgage Solutions, we work with our clients to help get them the best pricing in the industry. In fact, Orlando Magazine recently ranked us among the Top Rated Mortgage Brokers in Central Florida. And we even offer our services across the entire state of Florida.

If you are looking to get pre-approved, contact us and apply today! You can
call us at 407-898-4477 or email us at BZIMEL@STREAMLINEFLORIDA.COM.
You can also fill out an online form on our website.

A personal note from owner Brian Zimel – Your Helping Hand in Real Estate.

Tick. Tock.
    Tick. Tock.
Buying and selling real-estate is a process unlike any other. Think of it as an old timepiece whose surface may appear simple and elegant, but whose insides are complex and unpolished. It is a process built upon a network of intricate, formulaic, and intertwined parts that are all vital to making the clock move. With even the smallest of pieces out of place, the whole clock can stop.
 
Welcome to the world of real-estate.
Pre-approvals, appraisals, mortgage rates, inspections, amortization schedules, and more await those intrepid enough to buy, sell, insure, finance, and list real-estate.
In over a decade of working with homebuyers and realtors to finance homes with my company, Streamline Mortgage Solutions, I’ve been blessed to be able to witness dreams come true. However, with every happy ending I’ve witnessed, I’ve also witnessed hundreds of deals meet their end.
Too many times, I have had to watch homebuyers, sellers, and realtors pull the short end of the stick. I’ve seen homebuyers on the brink of financial collapse, and realtors whose long-nurtured deals have gone awry. The problems that cause these issues are simple and are completely avoidable. It all comes down to shortcuts and miscommunication.
 
Real-estate as a transaction.
You need to remember that with every purchase or sale, there is a multi-layered transaction being conducted amongst the realtors, appraisers, inspectors, mortgage brokers, and clients who are selling and buying the home. The success of the process lies in the hands of the selected parties’ ability to communicate effectively and in their ability to conduct due diligence when filing the proper paperwork. Each party needs to ensure that their part is complete, without any shortcuts being taken.
As a potential buyer, seller, or realtor, you need to know the tools of the trade and understand the process itself to make the right decisions and secure the right deal.
My personal philosophy, and our philosophy at Streamline Mortgage Solutions, is built around a promise of open and transparent communication. We think of it as a simplification of the process for both the realtor and the future homebuyer; a place where confusion isn’t a variable and where both the realtor and the client are treated with concierge service. 
 
Your source for all things real-estate.
We are developing this blog to be an active forum for the real-estate industry. Join us as we cover topics relevant to homebuyers, sellers, realtors, listing agents, and industry insiders. Like a master clockmaker, we will remove the simplified cover and explain the many working pieces of the real-estate transaction so that you can make the right decisions. Our goal is simple, to save you time. Feel free to comment, share, and participate in the discussion as we make this ultimate guide to real-estate.
We hope you’ll join us,
-Brian Zimel (Your helping hand in real-estate)

 
About the Author:
After a decade in the business world, Brian (Zimel) started Streamline Mortgage Solutions in 2005 to offer customized services that allow clients access to the industry’s best pricing. With over ten years of experience, he has built his local Orlando business into Orlando’s premier mortgage solution with $150 MILLION in mortgage loan volume, and an extraordinary level of service.

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