Thursday, February 16, 2012

Conventional, FHA, USDA...Oh MI!

Homebuyers often have a lot of questions about mortgage insurance (MI)...and understandably so. With different rules for different loan programs, the details can be confusing.

Here are a few things to keep in mind. All types of MI protect the lender in the event of default, and MI is typically required when homebuyers have less than a twenty percent deposit to put down on a home. There are two main types of MI: an Up Front Mortgage Insurance Premium (UFMIP), which is generally financed into the loan, and an additional monthly mortgage insurance premium (MIP), paid as a part of your normal monthly mortgage payment.

Here are some additional details to keep in mind:

Basics MI can be monthly or all up front 1% UFMIP rolled into loan amount + Monthly Premium 2% UF Guarantee Fee + Monthly Guarantee Fee
Potential Benefits Upfront MI can save significantly on monthly payments.
Conventional MI often has lower monthly payments than FHA.
Income requirements are relaxed compared to conventional MI & USDA.
There is more flexibility in credit scores.

Seller paid closing costs is allowable up to 6%.
The monthly premium is typically almost 1/4 the cost of FHA.
Potential Pitfalls Seller paid closing costs is limited to 3% if ≤5% down payment.
Credit requirements and income requirements are more stringent.
The monthly premium is typically higher than conventional & USDA. There are specific geographic and income eligibility requirements. Income requirements are much more stringent than FHA.
Dropping MI When the value reaches 78% of the original sales price, MI automatically falls off.
You can request removal if the principal balance reaches 80% (i.e. accelerated payment of principal or, in some cases via an appraisal of the property showing increased value).
You must meet two tests to drop FHA's MIP:
1. You must PAY the balance down to 78% of the original sale price of the property (you can't just get an appraisal to show equity).
2. You must pay the monthly MIP for a minimum of 5 years.
The USDA Guarantee Fee remains on the loan for the entire term. It can never be dropped from a USDA loan until the property is sold, refinanced or the loan is paid off.
** Note that the FHA MIP example is based on a 30 year example.

If you have any questions about mortgage insurance or anything at all, call me or email me anytime. I’m always happy to help.


Lester Wilkins
Blue Water Home Loans

Phone: 810-987-1200

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