Many years ago if you were going to buy a home you had two options – have 20% down or use either an FHA or VA mortgage. Over the years conventional loans began having an option of using private mortgage insurance (PMI) to allow you to put less than 20% down. This option is still there, but in the last few months, it has become more restrictive than it used to be. As of March 2009 there are several guidelines that have changed.
Mortgage insurance is not available for those buying a second (vacation) home, investment property or manufactured homes. Those buyers would need to have 20% down or use another program such as FHA. Your debt to income ratios cannot exceed 41% – meaning your total house payment and your debt such as car loans, credit cards, student loans and child support payments can't be more than 41% of your gross income. If your credit score is below 680 and you have a desktop underwriter expanded approval, you can't get mortgage insurance. If you are putting down less than 5%, you must have a credit score over 700 – some require 720. Most also require that you have a valid credit score – meaning 3 tradelines open and active with a 12 month history.
Private mortgage insurance is not an insurance that will pay off your loan if something happens to you. That is frequently called mortgage life insurance or credit insurance. Private mortgage insurance helps to offset the risk to the mortgage company in case the homeowner defaults on the mortgage. At this time, PMI payments may a tax deduction.
Mortgage insurance can be eliminated once you have 20% equity in the home. If you remodel or the value of your home increases, you can request to have the PMI removed. To do so, you will need an appraisal to show the value of the home and your payments have to be current for at least the past 12 months. Once you pay your mortgage down to 78% of the original mortgage, the lender is required to automatically remove the mortgage insurance. There are exceptions to that depending on late payments and other liens on the property.
Private mortgage insurance is there to benefit you by allowing you to buy a home with less than 20% down – it is not a bad thing, but it does protect the lender not the buyer. I have heard over the years that PMI is something to avoid. Many people took out second mortgages to avoid PMI. That may be cheaper at times, but as rates change on second mortgages, the PMI payments may be cheaper. The best decision is to look at what you can afford and what programs there are with your income, debt and the amount of money you have for a down payment. Your loan officer can help you make an informed decision that you are comfortable with.
