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Serving South Florida

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For over 35 years

Mortgage Insurance Primer

Conventional, FHA, USDA…

Homebuyers often have a lot of questions about mortgage insurance (MI)…and understandably so. With different rules for different loan programs, the details can be confusing.

Here are a few things to keep in mind. All types of MI protect the lender in the event of default, and MI is typically required when homebuyers have less than a twenty percent deposit to put down on a home. There are two main types of MI: an Up Front Mortgage Insurance Premium (UFMIP), which is generally financed into the loan, and an additional monthly mortgage insurance premium (MIP), paid as a part of your normal monthly mortgage payment.

Here are some additional details to keep in mind:

CONVENTIONAL “MI” FHAÂ “MIP”** USDA “GUARANTEE FEE”
Basics MI can be monthly or all up front 1% UFMIP rolled into loan amount + Monthly Premium 2% UF Guarantee Fee + Monthly Guarantee Fee
Potential Benefits Upfront MI can save significantly on monthly payments.
Conventional MI often has lower monthly payments than FHA.
Income requirements are relaxed compared to conventional MI & USDA.There is more flexibility in credit scores.

Seller paid closing costs is allowable up to 6%.

The monthly premium is typically almost 1/4 the cost of FHA.
Potential Pitfalls Seller paid closing costs is limited to 3% if ?5% down payment.Credit requirements and income requirements are more stringent. The monthly premium is typically higher than conventional & USDA. There are specific geographic and income eligibility requirements. Income requirements are much more stringent than FHA.
Dropping MI When the value reaches 78% of the original sales price, MI automatically falls off.
You can request removal if the principal balance reaches 80% (i.e. accelerated payment of principal or, in some cases via an appraisal of the property showing increased value).
You must meet two tests to drop FHA’s MIP:
1. You must PAY the balance down to 78% of the original sale price of the property (you can’t just get an appraisal to show equity).
AND
2. You must pay the monthly MIP for a minimum of 5 years.
The USDA Guarantee Fee remains on the loan for the entire term. It can never be dropped from a USDA loan until the property is sold, refinanced or the loan is paid off.

** Note that the FHA MIP example is based on a 30 year example.

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