Even for an experienced home buyer all the definitions and acronyms such as (PMI) private mortgage insurance may be confusing. For a mortgage broker the guidelines can sometimes be overlooked. The business itself must is built on loan processors and underwriters. The loan processor compiles and organizes all the required documents and double triple check it before sending it to underwriting and I can assure you from there something more will be required or needed to complete the process and get the clear to close. If an experienced home buyer feels this way can you imagine the first time home buyer? Beginning with one of the basic facts, Private Mortgage Insurance (PMI). What is it, what is it for, for whose benefit is it?
When buying a home, it is not uncommon for some lenders to require a down payment of 20% of the home’s purchase price. There are many lenders that offer loans with less than 20% down, even as low as 5% on a conventional and 3% on FHA. Most people are familiar with MIP (Mortgage Insurance Premium) on FHA. This is insurance the borrower has to purchase to insure their own loan against foreclosure. This insurance protects the lender not the borrower. When a borrower uses Conventional financing (Loans that are not federally insured) and they put less than 20 % down on your new home, your lender will usually require you to purchase Private Mortgage Insurance or PMI as it is commonly referred.
What exactly in PMI what is it for ? Simply put and very similar to MIP on FHA Loans it is an additional amount you pay along with your mortgage payment the protects the lender if you fail to pay, just like MIP on an FHA loan. Typically it is paid monthly with your mortgage payment, unless you make a one-time upfront payment for the PMI at closing, which always begs the question if you have money to pay it upfront why not add that same amount to your down payment therefore reducing the monthly premium and total interest paid over the term of the loan.
My best advice to you when shopping for a mortgage lender or broker is ask the lender or mortgage broker what will be required for a minimum down payment and what special home loan programs may be available such as FHA, VA, USDA. Once you narrow in on the loan program that best suits your needs ask questions, such as what the total cost of the insurance is and how much it will increase your payment once it is included. Ask what a one time premium would be and determine if paying it upfront would be a better benefit or applying that same money to the down payment and reducing the total interest paid and the monthly cost of the PMI.
Your Realtor or Mortgage Broker can direct you and there are also many good informational websites such as onesolutionrealestate.com and of course the Consumer Financial Protection Bureau can also help
The Larry Stepp Team at Gustan Cho Associates are available 7 days a week and Holidays. My Team of Mortgage and Real Estate people can guide you through this exciting and sometimes scary process.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com