Most buyers don’t want to pay for mortgage insurance because it benefits the lender by covering just the lender’s loan losses if the loan goes bad and the property is foreclosed.
However, buyers with less than a 20 percent down payment cannot obtain a conventional loan without also obtaining mortgage insurance through their lender. This column will reveal how it’s possible for the borrower not to have to pay for the required premiums with less than 20 percent down.
Like most types of insurance, the premiums for mortgage insurance are determined by the level of risk. In mortgage lending, risk is predicated upon the amount of the buyer’s down payment, the buyer’s credit score and the type of loan the buyer is applying for, among other factors.
In an example in which a buyer is purchasing a home for $250,000 and making a 10 percent down payment, the loan amount would be $225,000.
Assuming this buyer has a 760 credit score and is applying for a 30-year fixed-rate mortgage, and that they meet all of the standard mortgage qualifying criteria, the buyer would have the option of either a .44 percent annual premium ($82.50 per month) or a 1.37 percent up-front premium ($3,082) to pay for Mortgage Insurance.
Here’s the magic: On a purchase transaction, any interested party (seller, builder, real estate broker, etc.) can pay any up-front mortgage insurance premiums as a financing concession for the benefit of the buyer.
In today’s market, most real estate deals have some form of financing concession worked into the transaction. A financing concession occurs when one of the interested parties pays for the buyer’s closing costs, taxes and insurance due at closing, OR any Mortgage Insurance premiums due at closing.
If you are in the market to buy a home and are making a down payment below 20 percent, be sure to ask your lender what your options for mortgage insurance are before entering into contract. Doing so will put you in a position to negotiate the best terms for the home purchase and lowest-cost financing.
And by the way, don’t let your lender tell you that there is only one kind of mortgage insurance for your situation. There are five mortgage insurers in the U.S., and although they do have different premium rates and guidelines, they all offer options such as the ones listed in the example above.
Gabe Terreson is a 17-year industry veteran who regularly conducts workshops and seminars for mortgage consumers and real estate brokers. He is branch manager of Home Team Funding, a division of Pinnacle Capital Mortgage Corp. and can be reached at 360-993-5800, email@example.com or at www.hometeamfunding.com.