My fifth blog for the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked, is about a topic that actually is the source of at least a couple of Frequently Asked Questions.
"FAQ #5 ........ PMI/MI Why Do I Have To Pay It?"
When I first became a Loan Originator, I thought that everyone knew what PMI was and what it stood for, after all I did, and I knew nothing about the mortgage business. Well it quickly became very evident that was not the case, and that many people have not even heard the term before.
PMI stands for Private Mortgage Insurance, and it is an insurance that the Borrower pays on behalf of the Lender, on every Conventional Loan (Fannie Mae & Freddie Mac) if they do not make at least a 20% downpayment at the time they acquire the mortgage from a Lender. Yes you heard that correctly, the Lender needs to protect themselves for at least 20% of every loan they make, and it is the Borrower that pays for it, or they are not given the mortgage. This seems unfair at first, but once it is explained why the Lender needs to be protected for at least 20% of every loan it makes a little more sense.
The reason why the Lender needs to be protected for at least 20% of a mortgage, is in case the Borrower defaults on the mortgage and the Lender has to foreclose on them. 20% is the amount that most Lenders feel is required to make them whole for the costs that the Lender incurs during the foreclosure process.
When a Lender forecloses on a Borrower they have to hire an Attorney to represent them during the foreclosure. Once the foreclosure is completed the Lender hires a Realtor to sell the property and has to pay the Realtor a commission. But before the property is even put on the market for sale, the Lender in most cases needs to restore the property to the point that it is a salable property. This is needed because when a Lender forecloses on a Borrower, many times that Borrowers does very destructive things to the property before the foreclosure is completed. They put holes in the walls, rip out light fixture, toilets, sinks, destroy carpets, as well as many other destructive things. Restoring the property to the point of being able to sell it can be very costly.
The PMI payment will vary with the percentage that the Borrower originally puts down when they first acquire the mortgage. The PMI payment is adjusted at every 5% increment (5, 10, 15 percent) with a 5% downpayment being the highest payment, and a 15% downpayment being the least.
MI is the Finance Housing Authority (FHA) version of PMI, but unlike PMI there is very little difference in the MI payment regardless how much a Borrower puts down. And unlike a Conventional Mortgage, MI is charged on every FHA 30 Year Mortgage, even if the Borrower makes a 20% downpayment. The only way MI can be avoided on a FHA Mortgage is if it is a 15 Year or less Mortgage, and the Borrower is making a downpayment of 22% or more. So why would a Borrower who has 20% to put down on a mortgage take out a FHA Mortgage, the answer is simple, they would not unless it was because their credit scores are to low, or their Debt-To-Income Ratios are to high for a Conventional Mortgage.
In my next blog I will answer the question that is the natural next question on this topic, "At What Point Can I Get Rid Of The PMI Or MI?"
Previous FAQ's Blogs.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org