Mortgage Insurance Primer
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).
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.