The purpose of mortgage insurance (MI coverage) is to reimburse the lender for losses that may be incurred if a borrower defaults on a loan. MI tends to evoke a negative reaction from many borrowers, however, if not for mortgage insurance, every home buyer would need to put 20% down on their purchase, or would need a 20% equity position to refinance. The benefit received from MI is that it allows the lender to offer loan programs requiring a lower down payment. Both conventional loans and government guaranteed loans have mortgage insurance components.
Conventional Loan Mortgage Insurance (P.M.I.)
P.M.I. - This stands for Private Mortgage Insurance. Specialized insurance companies (such as Radian and Genworth) provide mortgage lenders with an insurance policy protecting them from losses sustained over and above the 80% L.T.V. threshold.
Example: If the home is valued at $100,000 and the loan amount is $85,000 that means the loan is at 85% L.T.V. (loan to value) and would require P.M.I.
There are 2 ways to pay for P.M.I – either the borrower can pay for it, or the lender can pay for it
B.P.M.I. – Borrower Paid Mortgage Insurance
Monthly B.P.M.I. – The borrower pays a monthly MI premium in additional to the normal monthly PITI payment
Single Premium Financed B.P.M.I – all of the mortgage insurance premium is paid at closing & is financed into the loan. No additional monthly premiums are required. The borrower makes a regular PITI payment
L.P.M.I. - Lender Paid Mortgage Insurance
You have seen a lender advertise a mortgage program without P.M.I. although the L.T.V. is over 80%. How do they do this? They utilize L.P.M.I. So, instead of having the borrower pay the P.M.I. fee, the lender pays the P.M.I. premium from the profit they make on the loan. This is called rolling the P.M.I. into the rate. The borrower pays a slightly higher rate so as to avoid a monthly or lump sum P.M.I. payment.
Example: A loan with a borrower paid P.M.I. may have a rate of 4% but, if the lender pays the P.M.I. the rate may be 4.875%.
L.P.M.I. can be a great alternative for someone who doesn’t qualify for P.M.I. either because of an elevated debt to income ratios or a less than perfect credit score.
IMPORTANT: The higher the L.T.V. the higher the P.M.I. rate. A borrower who puts down 15% will have a much lower premium than someone who only makes a 5% down payment. Also, remember, if your credit score is too low, or your debt to income ratio is too high, the P.M.I. rate will be higher, or even worse, you may not qualify for P.M.I.
Cancellation of B.P.M.I. Request
- Request Cancellation when your principal balance is scheduled to reach 80% of the original value of the property OR when the principal balance actually reached 80%
- Must make a written request to the current lender
- No 30 day late payments with last 12 months, or 60 day late payments in last 24 months
- Lender chooses who will appraise the property, not the home owner
- There must be no additional subordinate lien on title (ex. Home Equity)
- Must be current on your payments
- If the property is not a single family owner occupied property, cancellation criteria are based on the lender’s policies at the time the request is made. This usually means you will need a lower L.T.V.
Automatic Termination of B.P.M.I.
- B.P.M.I. must be cancelled when the principal balance reaches 78% of the original appraised value of the property OR when the borrower has paid 1/2 of their total required mortgage payments
- Must be current on payments
FHA Mortgage Insurance
M.I.P.: This stands for Mortgage Insurance Premium. M.I.P. is utilized on government loans particularly FHA insured products. M.I.P. is charged both as an upfront fee at closing and as an ongoing monthly fee. These fees are paid into the Mutual Mortgage Insurance (M.M.I.) Fund. This fund is handled by the Federal Housing Administration.
M.I.P. FACT: M.I.P. is regulated by HUD and changes every 6 months or so. The M.I.P. rate is determined by the date the FHA case number is ordered.
IMPORTANT: As of April 1, 2013, the new FHA M.I. guidelines are as follows:
Up-Front M.I.P. for 30 year mortgages in Mass. will range from 1.30-1.35% based on down payment
Monthly M.I.P. will be for the life of the loan, unless the borrower makes a 10% down payment, in which case, the M.I. will have a minimum term of 11 years.
Tips & Traps
- MI premiums may be tax deductible for Federal income tax purposes. Be sure to consult a tax professional
- L.P.M.I. can not be cancelled & will not terminate until the loan is refinanced or paid off
- Conventional loans have much higher FICO credit score requirements for M.I. approval, so a borrower with bruised credit may be left only with FHA as an option