Understanding Mortgage Insurance and the different types
The keys to home ownership can be tricky and confusing, unless handled by a true professional loan officer. You’ll sometimes hear loan officers and or realtors talk about one mortgage program over the other, telling you how great it is or that the monthly mortgage insurance is less than the other program. But wait, one main ingredient is still missing in this whole equation. What are the credit scores, aka fico scores. Why is this important?
When comparing a conventional loan to any other type of mortgage loan, many of the MI companies (mortgage insurance) will have certain restrictions when it comes to credit scores, the percentage of the down payment, and area restrictions.
Let’s quickly look at the four major types of mortgages.
Conventional Loans – If you have less than 20 percent down, you are required to have some sort of mortgage insurance. The standard mortgage insurance is called monthly mortgage insurance. There are such programs called LPMI (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). ps.. Mortgage Insurance doesn't always fall off when you hit 78% LTV (loan-to-value). Specific guidelines must be met still.
FHA loans – You have upfront mortgage insurance and monthly mortgage insurance. No matter if you have 20 percent or more down, you are still required to have monthly mortgage insurance. Depending on your credit scores, even with 20 percent down, a FHA loan still might be your better option. FHA raised it’s mortgage insurance as of April 18th,2011. New FHA mortgage insurance – Reminder – If you do put 20 percent down, the mortgage insurance falls off in 5 years.
USDA Loans – As it stands, there is no monthly mortgage insurance. But this will change come October 1st, 2011. New USDA monthly mortgage insurance.
VA Loans – There is no monthly mortgage insurance.
Summary of mortgage programs : Three of the major types of mortgages mentioned above, FHA loans, USDA loans, and VA loans, all have some sort of upfront mortgage insurance. Each one has a different name for it.
Here is a comment that I just heard the other day.
“The FHA Premium Rate Increase Makes conventional MI a Better Option for Many Borrowers.”
To me, this is a blanket statement, and a huge reason why so many people get put into the wrong types of mortgages. Sometimes the basic reason was because it was just easier for the loan officer and not what was better for the borrower. Mortgage Insurance guidelines change, but as of right now, you typically need a 680 credit score of better when putting 5 percent down. Many MI companies want a 700 credit score. When you hear about these special MI programs such as BPMI, you need a 700 or 720 credit score.
Summary :
When it comes to conventional mortgage insurance, not only do you need specific credit scores that have to be higher, but the loan gets underwritten again by the MI company. When it comes to FHA loans, it’s a one time thing. Again, you need a professional loan officer that understands these differences and who will dissect the different types. It might seem easy to some, but if not done correctly, it can be a long and confusing process.
The bottom line, just be careful of what you hear out on the street. Blanket statements could be expensive.
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~ Credit Score Series ~
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