In assessing the costs of homeownership, one thing most prospective buyers must put into the mix is the cost of Private Mortgage Insurance, known as PMI.  This insurance, underwritten by private companies, is usually required by your lender if you obtain a loan for more than 80% of your home's value.

Some lenders who carry their own notes bypass this requirement, but loans sold to Fannie Mae or Freddie Mac must have this insurance included in the mortgage payment. PMI protects lenders against loss if you default on your loan and enables you to purchase a home with less down.  If you put 5, 10, or 15% down, for example, PMI covers the difference up to 20%.

Rising foreclosures, especially among homeowners with little equity in their homes, have caused insurance companies to tighten underwriting standards.  This makes it harder to qualify for the required PMI coverage, especially in areas where foreclosures are high.  Homes are also being appraised more carefully to make sure the values are correct. 

One prominent player in the PMI industry, Mortgage Guarantee Insurance Corporation (MGIC) now expects borrowers to have a 700 credit score, a debt-to-income ratio of no more than 41%, and 10% down payment in hand.  Requirements vary among insurers, but few would agree to 100% financing on homes any more.

So, what should you do if you have a small down payment and a low credit score?  Your lender can present some options to you but the choices often include FHA financing.  FHA and other federal loan products include their own insurance, require a 3.5% down payment, and have lower credit score requirements than conventional lenders.  (Most lenders require a minimum 620 score these days, up from 580.)  More  liberal FHA requirement have increased its popularity in many areas, including Alabama, where FHA financing represent s30% of loans now compared to 5% back in 2005.

FHA loans have lending limits based on the area; the maximum loan can be over $729,000 in some areas, but in the Baton Rouge area, the limit is $280,000 for a single family home.  If you know you have limited funds for a down payment and other credit issues, you should set your sites on one of many fine homes in your price range - and within FHA guidelines.

The tougher standards might seem harsh but benefit the housing industry by promoting affordable, equity-based homeownership.  Twenty percent remains the magic number in the PMI world.  If you can put down 20%, you don't need PMI.  The closer your down payment is to 20%, the less you have to pay.  Once you have paid enough into your house to equal 20% equity, you no longer have to pay.

Sandy's Team can help you weigh your options and find you a great house in East Baton Rouge, Livingston Parish, or Ascension Parish.  We have a great stock of new and pre-owned homes available.  Give us a call at (225) 677-SOLD or email info@sandyco.com.