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PMI/MIP
Private Mortgage Insurance
Private mortgage insurance enhances a borrower's ability
to attain homeownership. Lenders require PMI on conventional
mortgages that do not have 20% equity because experience
reveals a strong correlation between borrower equity and
default. The less money a borrower has invested in a home,
the greater the probability of default. Thus, PMI is a financial
guaranty that protects lenders against loss in the event
that a borrower defaults. Without that financial guaranty,
lenders will typically require a down payment of at least
20%.
A recent title insurance industry study noted that first-time
homebuyers in 1994 spent three years saving for a down payment
before buying. And when they finally did buy, the average
down payment was 13.7 percent. Had they gone without mortgage
insurance and saved for the requisite 20 percent down payment,
these first time buyers would have been renting for a minimum
of four-and-a-half more years. Had they been willing to put
only five percent down, they could have realized their homeownership
dream in just over a year.
By not waiting and going with mortgage insurance, though,
these first time buyers increased their buying power. Instead
of having to wait to save $20,000 for the purchase of a $100,000
house, they would only have to save $3,000 to $5,000, or
with modern programs, often zero. One can see that
this type of leverage could also help purchase an even more
expensive home(if income and other factors are sufficient.) If
one had $10,000 saved and could qualify, that amount
could be used as a 5% down payment on a $200,000 home.
By allowing for this type of leverage -- the reason is seen
as to why so many young families today can afford homeownership
earlier in their lives and careers, despite earning and saving
relatively less than was traditionally required.
Don’t confuse private mortgage insurance with mortgage
life insurance. Private mortgage insurance puts people in
homes; mortgage life insurance pays all or a portion of your
mortgage in the event of your death.
Consumers who understand this difference, understand how
PMI enhances their ability to realize their dream of homeownership.
MIP or Mortgage Insurance Premium
An FHA loan will require a mortgage insurance premium (MIP)
for its homebuying programs. An up front premium of 1.50%
of the loan amount is paid at closing and can be financed
into the mortgage amount. In addition, there is a monthly
MIP amount included in the PITI of .50%. Condos do not require
up front MIP - only monthly MIP.
The mortgage insurance premium paid on an FHA loan is always
significantly higher than on a conventional program. On an
FHA loan the borrower will be charged a mortgage insurance
premium equal to 1.50% of the purchase price of the property
and a renewal premium of .500% in subsequent years. By contrast
the mortgage insurance premium charged at closing on a conventional
program is as low as .500% (with 10% down payment) with renewal
rate in subsequent years as low as .300% in subsequent years.
FHA mortgage insurance allows a homebuyer to make a modest
down payment and obtain a mortgage for the balance of the
purchase price.
The mortgage loan is made by a bank, savings and loan association,
mortgage company, credit union, or other FHA-approved lender.
FHA (HUD) insures the loan and pays the lender if the borrower
defaults on the mortgage. Because the lender is protected
by this insurance, it can offer more liberal mortgage terms
than the prospective homeowner might otherwise obtain.
HUD does not make direct loans to help people build
or buy homes.
Almost any individual who has a satisfactory credit record,
enough cash to close the loan, and sufficient steady income
to make monthly mortgage payments without difficulty can
be approved for an FHA-insured mortgage. Generally, only
people who will reside in the property are eligible for FHA-insured
mortgages.
HUD sets no upper age limit for the borrower, nor does HUD
require that the borrower have a certain income level to
buy a home at a certain price. Income is simply one of several
factors that help a lender and HUD determine whether the
borrower will be able to repay the mortgage.
FHA mortgages are available to individuals regardless of
race, creed, religion, sex, or marital status.
HUD insures mortgages to buy existing homes, to improve
homes, to purchase a newly built home, and to refinance existing
indebtedness. FHA-insured mortgages are available for many
types of properties, including:
- Single family residences
- Two, three and four-unit properties
- Condominium units
- Houses needing rehabiltition
- The terms of FHA-insured mortgages can also be structured
in different ways, such as:
- Fixed rate, level payment mortgages
- Graduated payment mortgages
- Growing equity mortgages
- Adjustable rate mortgages
The borrower's initial cash investment
is the difference between the amount of the mortgage and
the total cost of the home. The total cost includes the purchase
price plus closing costs, but it does not include prepaid
items that you have to pay at settlement, such as real estate
taxes and hazard insurance. Most FHA programs require the
borrower to invest a minimum of three percent of the total
property cost.
HUD charges a premium to insure mortgages.
The premiums are used to pay claims to lenders when a borrower
defaults on an FHA-insured mortgage.
Most borrowers with FHA-insured mortgages currently pay
an up-front and annual mortgage insurance premium (MIP).
The up-front MIP can be financed into the mortgage. Jeff
Daily can provide you with more information about MIP charges.
Information on MIP provided by U.S. General Services Administration
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