Private Mortgage Insurance, Yuke! How can I get rid of it?

What is private mortgage insurance and why do I need it? Private mortgage insurance is insurance purchased by the borrower for the lender to protect the lender in case the borrower defaults on the loan. Studies have shown that the less money someone puts down on a loan, the more likely they are to default. Whenever you get a conventional loan and have put less than 20% equity, the lender will require that you purchase private mortgage insurance or mortgage insurance (MI) for short on their behalf. A conventional loan is generally referring to loans that are not government loans and follow Fannie Mae or Freddie Mac guidelines. Twenty percent equity is either referring to a 20% down payment on a purchase or having 20% equity in your home when you refinance. It is calculated using the Loan to Value (LTV) ratio. So, if you put $20,000 down on a home purchase of $100,000, you get an 80% LTV. This is calculated as follows: $80,000 / $100,000 = 80% or Loan / purchase price or appraised value, whichever is lower.

So, if the property you are buying or refinance is worth $100,000, you will have to either put $20,000 down or you will be required to purchase mortgage insurance. Today, there are loan programs that will go up to 97% LTV. The higher the loan to value, the more expensive the mortgage insurance will be.

Mortgage Insurance is seen as a necessary evil. If you don’t have a 20% down payment, you can’t get a loan without it.
Okay, I get it. Now how do I get rid of it?

The Homeowners Protection Act o f 1998 (HPA) covers single family primary residences and allows for homeowners to request to cancel their mortgage insurance for loans that we closed on or after July 29, 1999. Sounds simple enough, but here is how it works. The lender will automatically remove the mortgage insurance once the loan balance is first scheduled to reach 78% based solely on the initial amortization schedule. This could take anywhere between 4 and 15 years depending on interest rate and term of the loan. Mortgage Insurance will only be cancelled if the borrower has good pay history.

On the other hand, you can request in writing for the lender to remove the MI once the principal has been paid down to 80% of the original purchase price or appraised value if it was a refinance. Mortgage Insurance will only be cancelled if there are no subordinate liens, the borrower has good pay history and the lender feels the property has not declined in value.

You can also request for the lender to go off the current value of your home by requesting a new appraisal of which you will have to pay for. To do this, loans need to be in place for at least 2 years. If the loan been in place for 2 to 5 years, the Loan to value must be less than 75%. If the loan has been in place for more than 5 years, the loan to value can be 80% LTV or less.

If you have mortgage insurance, contact the mortgage company that is collecting your payments and ask them what their requirements are for removing MI. These are general guidelines and a particular lender could have tighter guidelines than what is described above.

Lastly, the premiums that you pay for mortgage insurance could be tax deductable. If you refinanced or purchase a home in 2007 or after, the mortgage insurance you pay may be tax deductable depending on your adjusted gross income. As of now, Mortgage insurance is tax deductable through 2011. Consult with your tax professional to determine if you qualify.
George Beylouny is the Branch Manager for Silverton Mortgage Vinings.

Is a FHA loan right for you?

One of the most common questions I get asked on a daily basis other than “What is the rate?” is “What is the best loan for me?”   To answer this question requires a thorough understanding of the client and what they are looking to achieve both in the short term and in the future.   In today’s tough lending environment, there are essential two types of loan available: Government which includes FHA, VA and USDA and Conventional loans.  Government loans are insured by the Federal Government, while conventional loans are underwritten to Fannie Mae or Freddie Mac guidelines and are not insured by the government.  Although, today the government does control both Fannie and Freddie, but that is a topic all to itself.

 For the purpose of this article, we will be spending our time dissection the FHA loan.  First of all, what is FHA and what is its purpose.  FHA stands for the Federal Housing Administration and it was created by the National Housing Act of 1934 to increase home construction, reduce unemployment and operate various loan insurance programs.   There are several advantages for using FHA financing.  The first is the low down payment requirement.  Today, FHA only requires 3.5% of the purchase price for a down payment.  If someone is buying a house for $100,000, they would be required to bring a minimum of $3,500 to the closing table.  They would also be required to pay closing costs but this can be negotiated with the seller to have him pay it.  The second advantage of FHA is that is allows the seller to pay up to 6% of the closing costs, which should cover all closing costs.   Make sure you speak with a loan originator so you will have a good idea how much closing costs will be for your transaction.   Another nice feature is that a FHA loan allows for a family member to gift the funds needed to close on the loan.  The person giving the needs to be an immediate family member such as parent, grandparent, sibling or spouse and can gift the entire amount needed to close the loan.

When it comes to determining how much you can qualify for in terms of maximum loan amount,  we use the debt-to-income ratio.  This ratio is calculated by taking your gross monthly income and dividing it by your total monthly expense plus your new housing payment.  So if you make $5,000 per month and your minimum monthly expenses that show up on your credit report equals $850 and your new monthly mortgage payment will be $1,000 your DTI will be (850+1000)/5000 = 37%.  FHA will typically go up to 50% or more with compensating factors.  FHA allows for a family member to act as a non-occupant co-borrower and help the borrower to qualify.  This is a fantastic feature of FHA. 

Possibly the main reasons why someone chooses to go with FHA is the credit profile requirements.  FHA is more lenient than other types of financing.  FHA does not typically require someone to pay off open collections or have a specific number of open trade lines (credit accounts are also called trade lines), although this falls under the underwriter’s discretion.   Another credit advantage is for someone who has had a bankruptcy or foreclosure in the past.  For Bankruptcies, FHA requires 2 years after a Chapter 7 has been discharged and you can still be in a Chapter 13 as long as you can show 12 months of payment history.  As for a foreclosure, you will need to wait 3 years from the time the foreclosure settlement date.  Lastly, one can typically get approved with a middle score as low as 620 and still get a great interest rate.   

To summarize, FHA is a fantastic loan for a first time home buyer, someone with lower credit or newly established credit, someone who needs assistance from family in terms of cash to close or income to qualify.  

Am I Lendable?

Can I get a Loan?

This is a great question, especially in today’s tough lending environment. Today, everything is on sale when it comes to real estate, but for most of us, we will need some assistance in the way of a mortgage to help finance home ownership. When I sit down with a client, I go over the 4 C’s of lending with him. The 4 “C’s” of lending are Credit, Collateral, Cash to close and Capacity to repay. Each category is a very important part of the loan process and anyone of them is reason for a lender to turn him down. Now the best part is that when working with a knowledgeable Loan Originator, if you are not able to qualify for a loan today, he will set up a road map so you will be able to do so in the near future.

The First “C” of lending is Credit. When applying for a loan, a lender is going to pull your credit report from all three major credit bureaus: Equifax, TransUnion, and Experian. Credit scores range from 350 to 850 and in order to qualify for a loan today, you will typically need a minimum between 620 and 640. In order to qualify for the best rates, your middle credit score will need to be at least 740. You can get a copy of your credit reports for free at www.annualcreditreport .com. In order to get you score with the free report, you will have to pay a small fee. So what does a credit score mean? In simple terms, it rates the likelihood that you will pay your loan back. So, the lower the score, the less likely you are in the lenders eyes to be able to repay the loan and thus will most likely have to pay a higher rate or put more money down.

“C” number two is collateral or the property itself. As part of the loan process, an appraisal will be ordered to come up with a value for the home you want to buy. If you are to get a loan, the house should be worth at least as much as you are paying for it. If not, the lender is on going to lend based on the amount of the purchase price, so you will have to make up the difference. Now the value is just one issue with the appraisal. The second is the condition of the property. Most loan programs want the property to be in at least average condition. If the property requires a lot of repairs, the lender may require those items to be corrected before the loan can close and if you are buying a bank foreclosure, the bank may not be willing to do this.

The third “C” is Cash. In order to buy a property today, you will need a required amount of money to execute the transaction. We will have to source and season the funds. This is done by reviewing your most recent two months of bank statements. All large deposits must be sourced and come from an acceptable place. A refund for you taxes is acceptable. Money you have been saving under your bed is not.

The final “C” is the Capacity to repay or Income. You must have some source of stable income. This can come from a job, retirement or disability to name a few. It must be ongoing with the likelihood to continue for at least 3 years. Income is one of the toughest parts of a loan document and much time goes into determining how much income can be used. Lenders use the DTI or Debt to Income ratio to determine your maximum loan amount. The ratio needs to be below 50% and is calculated by taking your total monthly expenses (those that show up on your credit report) and your new mortgage and dividing that number by your gross monthly income. . So if you total monthly expenses are $3,500 including the new mortgage payment and you make $10,000 a month, your DTI will be 35%.

If the four “C” can meet the requirements required of the loan program, you should be in great shape to qualify for a home loan today!

By George Beylouny – 678-428-6514, george@mgatl.com