Private Mortgage Insurance (PMI) is essentially required by a lender when a buyer is purchasing a residential property with a deposit of less than 20%. The main purpose of PMI is to protect lenders from suffering losses when a borrower defaults and their property goes into foreclosure.
The two categories of insurers are the government, through the Federal Housing Administration (MI), and private companies (PMI). Criteria that will affect a borrower’s ability to obtain PMI/MI include acceptable credit, work history, debt-to-income ratio, down payment of less than 5%, and lack of reserves. In some cases, a borrower may be refused PMI/MI based on the appraisal, the location and whether it is a primary home.
Fees for PMI (fannie/Freddie) or MI (government) vary based on the size of the loan and the percentage of down payment and will usually cost between 0.3% and 1.15% per year, based on the original loan amount, until the loan-to-value ratio hits 80%. Federal law requires lenders to disclose, at closing, the amount of time it will take the borrower to reach the point that PMI/MI can be canceled. PMI/MI will automatically be canceled when that level reaches 78%. However, some FHA borrowers will be required to pay PMI/MI for the duration of the loan.
For more information on Mortgage Insurance, please contact the Pamela Riesenberg Team at Reliant Mortgage Company, LLC.