Private mortgage insurance is an insurance that is required on any conventional loan where less than 20 percent of the sale price is paid at closing of the loan. This insurance reduces the risk to the lender in that he will be paid losses in the event the borrower defaults on the loan. This insurance is calculated yearly and the amount is divided by 12 to get the monthly amount that is added to your payment. There are ways to avoid paying mortgage insurance in a purchase. If you currently have a mortgage where monthly mortgage insurance is being paid, The Homeowner's Protection Act of 1998 requires that your lender tell you when mortgage insurance will (or can be) dropped off.
Avoiding Mortgage Insurance
Visit your mortgage broker and talk about conventional purchase loan possibilities where private mortgage insurance (PMI) can be avoided. He will explain about a first mortgage of 80 percent of the purchase price, requiring a 20 percent down payment. An 80 percent conventional loan does not require mortgage insurance.
Discuss the possibilities of structuring an 80/10/10 if a full 20% of the purchase price is not in your budget. This requires a 10 percent seller-held (or bank-held) second mortgage, and 10 percent of your own funds for down payment. The conventional loan is an 80 percent loan, and removes the need for mortgage insurance.
Discuss the mechanics of a VA loan with your broker if you have VA eligibility. This is another type of loan that does not require private mortgage insurance. It can be a 100 percent loan, but the VA funding fee is more costly with no down payment. A 5 percent down payment will reduce this, however, and the funding fee can be paid by the seller at closing.
Consider which avenue of purchase loan you prefer. Consider amount of monthly payments on a first and second mortgage as compared to one higher payment on a 100 percent VA loan, and have broker pre-qualify you for loan approval. Discuss all costs involved, and amount that you will need to provide at closing.
Check your balance and payment history if you have an existing mortgage. If you can prove that your loan is now at 80 percent of the value (an appraisal can be done), you may be able to get the lender to drop off mortgage insurance on a conventional loan, thereby avoiding mortgage insurance payments. If you are currently in an FHA mortgage, you can avoid the monthly MIP (mortgage insurance premium) payment when your loan reaches 78 percent of the original sale price. You must have a pristine payment history for either of these situations to work in your favor.
The USDA Rural loan is available for purchases in low populated areas of the US. This is a 100 percent loan, and has no monthly mortgage insurance costs, but there is an up-front cost of insurance which can be financed or the seller can pay. This loan is designed for lower income families.
FHA's 15 year program does not require any monthly mortgage insurance premium (MIP), but does have an upfront amount which can be financed, or can be paid at closing by the seller.
You must have been making payments for at least 5 years before the FHA lender will allow the monthly insurance to drop off. This is true even if you reach 78 percent before 5 years.
If you are in a mortgage where you are paying mortgage insurance, and are attempting to get the lender to drop it off, you must make your request in writing to the lender.
Things You'll Need
Last two year's W2 forms
30 days of pay stubs
two months of banking info showing assets
Documentation of other liquid assets
Good credit report and scores
If VA, Letter of eligibility