Mortgage Insurance for Lower Down Payment
We have to face it – there just isn’t as much credit and cash to go around today as there was a few months ago. In spite of that fact people still have to buy a home from time to time for a plethora of reasons. Some may be transferring to new locations or simply graduating, marrying and buying a home. In fact the National Association of REALTORS has a prediction of 4.8 million homes being sold this year by members and non-member agents.
Bigger Families Need Larger Homes
A few months ago, less than 3 years, it was possible for a wide range of home buyers to purchase a home without making any down payment. While some of that activity is to blame for the mortgage crisis the truth is well qualified buyers have always had access to loans which would not require as much of a down payment especially with the use of a company which insures the lender against loss. The mortgage insurance companies have been around for many years and are very good at evaluating risk to their own investors as well as the market place. True enough some of them suffered huge losses after the “bubble burst” (aka market correction) but others had been a little more cautious on the run up and therefore did not suffer as great a hardship as others.
Who does Mortgage Insurance benefit?
That’s a two sided answer. MI benefits the home buyer because it allows them to purchase a home with a much lower down payment thus retaining their liquid capital or simply to make a lower cash injection at the time of purchase. Considering the down payment on a $200,000 home at 20% would be $40,000 and MI will allow a buyer to acquire the property with a down payment of as little as $6,000 I would say that could be a great benefit to the buyer.
Mortgage Insurance also benefits the lender. In fact if the lender does their job right, and most do, if the buyer ever defaults on the loan the MI company will be responsible for indemnifying the lender according to the policy provisions. It is an absurd assumption that MI companies and lenders collude on foreclosures “just to get the home” since MI companies actually fight with the lender to do their best to keep from paying the claim!
How much does Mortgage Insurance cost?
This varies by credit score, loan amount, property type, and a couple of other factors. Today I priced a 97% loan for someone with a 680 score on a $200,000 loan in Georgia and the amount was around $200 per month. Considering that will keep $37,000 in the buyer’s pocket I would call that a real bargain!
Do I have to pay Mortgage Insurance for as long as I own the home?
Mortgage Insurance can be cancelled when the amount owed on the home is less than 80% of the current value of the property. It is up to the home owner to keep up with this and notify the MI company. Obviously an acceptable appraisal or valuation per the MI company’s guidelines will be required. Typically this is about 5 years after the purchase in a stable market.
More questions about Mortgage Insurance
I can answer your mortgage related questions about purchases in the state of Georgia. Simply use the Contact Me form or call me at my office at 770-818-4365.
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What are “seller concessions”?
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You may have heard the term seller concessions in conjunction with a home purchase. What is generally meant by that term is when the seller uses part of the proceeds of the sale to pay some of the costs of the loan for the buyer. Generally speaking government loans allow up to 6% (of the loan amount) in seller concessions and conventional loans allow up to 3%.
Seller concessions are intended to pay closing costs and pre-paids, not down payment. If the seller wishes to contribute more than the allowed maximum in lender allowed concessions the simple solution is to lower the sales price. In return this lowers the loan amount and the seller can still cover the closing costs and pre-paids (taxes, insurance, HOA escrows) from the proceeds of the purchase. The proceeds, in case you are wondering, come from the money going to the seller for the purchase of the home.
Plain math example:
- Allowed seller concessions 6%
- Closing costs 1.5%
- Pre-paids 4.5%
- Sales price $200,000
- Loan amount $193,000
- 6% of $193,000 is $11,580
- Cash to seller decreased to $181,420 ($193,000 – $11,580)
- Cash from buyer $7,000 (down payment)
The seller cannot contribute (under most rules) to the down payment. Seller concessions can only go to closing costs and pre-paids. Check with your reputable lender and see what maximum concessions are and how they may be used for your particular loan program.
As a seller offering the max in concessions is a great way to attract buyers.
UPDATE: Taxes, insurance and HOA are NOT considered closing costs. Although they may be paid at the time of closing they are costs that would be required to be paid regardless of whether or not there is a loan. If you do not wish to escrow your taxes, insurance and HOA fees most lenders and most loan programs allow a “waiver of escrow” for a small increase in interest rate. The reason the interest rate increases is because loans without escrow accounts present a higher risk to the lender.
Related articles
- FHA Gets Tougher on Mortgages (online.wsj.com)
FHA insurance changes
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The cause for celebration over Federal Housing Administration lowering the upfront mortgage insurance premium is short lived. Concurrent to lowering the upfront fee is the increase of the monthly insurance premium fee.
Lowering the UFMIP from 2.25% to 1% will certainly decrease the amount of repayment. However, increasing the MIP from .55% to .90% (on loans with a down payment of 5% or less) will increase the cost of repayment significantly. The end result will be the FHA having more operating capital if the result is not a significant decrease in the number of sales due to borrowers not being able to qualify on debt-to-income ratios.
Currently, if you are purchasing a home at $200,000 (for example) with the FHA minimum down payment of 3.5% your base loan amount, prior to the UFMIP add back, is $193,000. Adding back the UFMIP, at the current rate of 2.25%, brings the loan amount to $197,343. The MIP cost per month, at the current rate of .55%, is $90.45 per month.
After October 4th 2010 the UFMIP will be only 1% meaning the loan amount including UFMIP will be $194,930 – a savings of $2413 on the purchase price. However with the new MIP rate of .90% the monthly MIP addition to the payment will be $130 – resulting in a payment approximately $40 per month higher. At that rate the savings on UFMIP ($1900) will be lost in about 4 years.
One plus is that, at least currently, MIP does have a tax benefit and the buyer should consult their tax preparer for detailed information on the tax benefits of a monthly mortgage insurance premium.
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- UPDATE 1-US FHA set to increase borrowing costs next month (reuters.com)
- Senate approves higher government mortgage fees for new loans (usatoday.com)
- Higher Government Mortgage Fees Approved By Senate (huffingtonpost.com)
- US FHA set to increase borrowing costs next month (reuters.com)
- FHA Insured Mortgages: A Disaster In The Making (businessinsider.com)
Mortgage payment calculation made simple
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Any real estate agent who has been in the business more than a few minutes and has shown a home or two has been asked the question, “how much would the payments be?” Chances are the agent does not have their mortgage calculator in their hands to input the mortgage rate, loan amount and other important factors. However, they do have their brain available and can easily estimate a mortgage payment for any home.
Real estate agents are not expected to be mortgage professionals but customers shopping for a new home do expect them to be able to answer the monthly payment question. There is a very simple way of calculating a mortgage payment based on any rate and it can easily be done without a calculator or even pen and paper.
Calculating the interest would be quite straight forward. The trick is always getting the principal added back in to the payment. So, in disregard to accuracy to the penny (or even the dollar for that matter) you can use some historic data to calculate the mortgage payment.
FHA down payment gift rules
In 2008 the Federal Housing Administration, in a move to try and get permission from congress to insure 100% home loans, were able to get most private third party down payment assistance programs eliminated from the process. Government and civic organizations are still able to operate but some of the largest DPA companies are out of the business of helping home owners with their required contribution to the loan process. 
Since that date the only way to get down payment assistance is from generally higher priced government assistance programs or from a gift from a family member or employer. According to the HUD Handbook, chapter 2-10(C):
“Gift Funds.An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.”
There is much more to it than simply having the funds available. Not only does the gift money have to exist. The paper trail, evidence of the donor’s ability to give and proof of the relationship also has to be verified.
Finance Challenge: Reserves – the right amount, the right type, the right timing
So you have the down payment – sourced and seasoned just like it needs to be. All saved up, stored away nicely in the bank for the last 60 days, and ready to be invested into a home. The closing costs are there, too, and all perfectly documented for the last two months. Great job! Your down payment and closing costs are in order. This is something to be proud of!
It’s always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the speficied amount of reserves. What are reserves? Straightforward it is enough to conver the principal, interest, taxes, and insurance (at a minimum).
Most loans require two months of reserves on the purchase of a primary residence and as much as six months (PITIA) on investment property purchases. But it’s not enough they be available they must also be sourced and seasoned just like the down payment and closing costs.
Here’s a little good news, though: reserves don’t have to be in cash form. In fact 100% of the following can be counted for reserves:
- Stocks, bonds, mutual funds, U.S. government securities, and other securities that are traded on an exchange or marketplace general available to the public (such as NYSE, NASDAQ, Midwest SE, CBOT, or OTC) whose price can be readily verified through financial publications.
- Cash-value life insurance (rather than face-value) that is verified. The borrower must be the owner of the policy and not the beneficiary.
- Personal IRA and SEP-IRA accounts that are owned by the borrower and verified.
- The borrower’s portion of undistributed trust funds.
Additionally a portion of the value of the following may be counted as reserves:
- 401(k), KEOGH, 403(b) and other IRS-qualified employer plans may be counted as reserves; however, to account for withdrawal penalties and estimated taxes, 70% of the vested amount of the account should be used to determine the borrower’s available reserves. The borrower will be required to provide documentation that the funds are accessible for withdrawal. If the retirement account only allows for withdrawals in the event of the borrower’s employment termination, retirement, or death, these funds should not be considered as reserves.
- Savings bonds may be counted at 100% of face value if mature. If the bonds are not mature, the amount counted towards reserves is based on the redeemable value at the time of underwriting.
Ask your Loan Officer about reserves. If you are an agent and want help understanding these please never hesitate to call me or have your client call me. I’m more than happy to help even if I do not have the ability to assist in your area.
Ken Cook – Nationwide Specialist – Information/Marketing – FHA Home Loans – 678-439-8683
Finance Challenge: Reserves – the right amount, the right type, the right timing
So you have the down payment – sourced and seasoned just like it needs to be. All saved up, stored away nicely in the bank for the last 60 days, and ready to be invested into a home. The closing costs are there, too, and all perfectly documented for the last two months. Great job! Your down payment and closing costs are in order. This is something to be proud of!
It’s always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the specified amount of reserves. What are reserves? Straightforward it is enough to cover the principal, interest, taxes, and insurance (at a minimum).
Secrets of Real Estate Investing?
You have seen them: the secrets of real estate investing. Anytime you see that word “secret” get out your wallet. I can tell you for a fact there are no secrets. In fact, anything that is a secret hasn’t been used. Gurus could not pack rooms for thousands of dollars if you accepted that there are no secrets. Alas, there are no secrets. But there is a randomly issued series of letters (ie blog posts) and let’s call this The Billionaire Real Estate Investor’s Super Top Secret Number One.
Alas, again, there are no secrets. But there are some really important things to learn!
Here are the CONVENTIONAL (Fannie Mae) FINANCE basics of real estate investing:
Borrower must be full doc – this means able to prove income and assets with acceptible documentation.
Borrower must not own more than three properties on credit.
Minimum loan amount – generally is $50,000
Property must be in move-in condition (there are caveats)
Interest rates at 80% LTV and below are very decent right now
Minimum of 15% down payment must be sourced and seasoned
Expect to pay a minimum of 20% down even in the face of the previous statement
Your MIDDLE credit score really is going to need to be in the high 600′s
Closing costs, depending on how desperate the bank or loan officer is, are going to be around 3% on a $150k loan
PMI companies do not currently offer insurance on investment properties (unless something changed before you read this)
Join me the next time for The Billionaire Real Estate Investor’s Super Top Secret Number Two: How to beat the Fannie Mae four property limit
But see, these are not secrets. They are just some things that not everyone knows. When you really need answers just pick up the phone and give me a call at 678-946-0101 or email me at REIBroker AT gmail.com
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