December 8th, 2011 11:46 AM by Diego Quintero
Article first published as, PMI, Avoiding Delays in Underwriting, on Technorati
Mortgage Insurance is necessary whenever a loan is above eighty percent of the value of the home using conventional financing. It is an insurance policy that consumers pay in case of default or non-payment. The monthly costs of the mortgage insurance (MI) policy vary depending on the loan parameters and the individual. Guidelines are ever-changing and this loan requirement demands its own underwriting procedures which may prolong your final loan approval, so be prepared!
It is rather odd that you are effectively paying a policy that would cover your inability to pay your monthly mortgage payment. But, it’s true. For an FHA loan, you will pay an MI premium no matter what loan amount or ratio. However, in conventional financing, the monthly premium decreases if you are closer to eighty percent of the value of home versus ninety-five percent. Income, debt, type of property, and several other aspects of the file are also considered while determining policy costs.
Over the last year, we have witnessed the MI companies make a come back. They loosened guidelines and decreased premiums over the past six months or so. Interestingly, most brokers and bankers are currently running into their critical observations of appraisal reports and income analysis. In many instances, they are asking for more comparisons for the appraisal or requiring explanations regarding income. In essence, conventional loans are being underwritten by two separate companies; the bank & the MI company, a separate third party entity that can ultimately deny your loan.
How can anyone avoid mortgage insurance? Simply stated, consumers would need to buy homes with at least a twenty percent down payment or take out a non-conforming loan (one that is not sold to Fannie Mae nor Freddie Mac). Non-conforming lenders usually add a point of interest to the Fannie Mae rates to build-in the additional risk of not having an insurance policy in place. Additionally, the loan to values may only max-out at ninety percent, so at least a ten percent down payment may be required to avoid the MI payment and MI underwriting, altogether. But if you want to take advantage of the greatest rates ever offered, then twenty percent down is the best option if you are trying to sidestep the need for MI.
Avoiding problems with underwriting may be as easy as asking a few questions about your loan file. While getting a loan approval from your trusted mortgage broker, get the final calculation of your debt to income ratios. If they are forty percent or higher, be cautious that your loan may not be held up for lending purposes but for mortgage insurance purposes. Find out how close your comparisons measure the value of the home you are buying or refinancing. Weigh the differences of paying a greater interest rate forgoing the MI, perhaps there is room for it to make sense depending on your financial position or market conditions.
Although MI companies are appearing to insure more borrowers they are still remaining cautious by insuring only the loans that will, in fact, perform. Those who forgo MI and choose a higher rate loan program will not truly have an option to reduce the interest rate unless refinancing. With today’s low rates, refinancing may not be an option in the future. However, one can request to remove MI by contacting the servicing bank and asking them do so. If your loan is 78% or less of the value of the property, you are free of having to pay the monthly premium ever again. For more accurate and detailed information, review the Homeowner’s Protection Act.
Your Trusted Mortgage Broker,
Diego L. Quintero