mortgage down payment Archives

Conventional Loans and Mortgage Insurance

If you took out a conventional loan, such as a Fannie Mae loan, you pay what’s called Private Mortgage Insurance. Lenders require you to pay this insurance if you make a down payment of less than 20%. By law, this insurance must be canceled by the lender once you owe less than 78% of the home’s original value, though.

There’s even better news, though. You can request cancelation of the insurance as soon as you owe 80% or less of the home’s current value. This may happen sooner than your original mortgage documents show, but it’s up to you to prove that you do owe less than 80% of the home’s value.

If you follow the original amortization schedule, you will know the exact month that you will be able to request that the lender cancel your PMI. You must request the cancelation in writing. If you know your home appreciated, though, you may request cancelation sooner. Here’s how.

First, you must order a professional appraisal. While you can likely get an estimated value of your home on sites like Zillow and Redfin, the lender needs solid proof that the home is worth what you say. With a professional appraisal report in hand, you can determine if you owe less than 80% of the home’s new value by dividing the home’s value by the outstanding principal balance on your loan. If it’s less than 80%, you can request cancelation.

Keep in mind, though, that this is up to lender discretion. Some lenders allow you to cancel PMI early if you can prove your home appreciated, while others don’t allow this method. If that’s the case, you must wait until the anticipated date that you will hit an 80% LTV to cancel the insurance.

FHA and USDA Loans and Mortgage Insurance

If you take out a government-backed loan, such as an FHA loan or USDA loan, you’ll also pay mortgage insurance. In fact, you’ll pay mortgage insurance twice with these loans. The first time is at the onset of the loan. You can either pay the insurance upfront at the closing or wrap it into your loan amount.

You’ll then also pay annual mortgage insurance, which is similar to the conventional loan’s PMI. Unlike conventional loans, though, with government-backed loans, you can’t request cancellation of the mortgage insurance. You pay the premiums for as long as you have the loan.

Luckily, your premiums will drop as you pay down your principal balance, but the insurance never goes away. The lender figures your annual mortgage insurance premium based on the average annual balance of your mortgage each year. They then charge you 1/12^th of that amount with your mortgage payment each month.

The only way to get out of paying mortgage insurance on a government-backed loan is to refinance out of that loan program. Many borrowers take an FHA loan because of the low down payment requirements and flexible underwriting guidelines when they first buy a home. Once they are more established and able to qualify for a conventional loan, owing less than 80% of the home’s value, though, they refinance out of the FHA loan. This eliminates the mortgage insurance once and for all.

VA Loans and Mortgage Insurance

The one government-backed loan that doesn’t require mortgage insurance is the VA loan. This program, which is reserved for veterans, requires only a VA funding fee at the onset of the loan. The VA nor the VA approved lenders require mortgage insurance.

The VA does guaranty the loans for the VA approved lenders, though. If a veteran defaults on their loan, the VA pays the lender 25% of the amount lost. This is often much higher than any down payment borrowers make, so it’s a decent risk for lenders to take.

Mortgage insurance is there to help you get a loan with little money down on it. While it seems like yet another pesky fee, it does help you become a homeowner. Without that insurance and/or 20% down on the home, you could find yourself without the home you wanted.

Shopping for a mortgage does not have to mean sticking with your local bank anymore. Today, you have several options including banks and nonbank lenders. While they may seem similar, because you can obtain a mortgage from both, there are many differences you should understand. Some people do not benefit from obtaining a mortgage from a bank. Others are perfect candidates for such a loan.

Differences in Restrictions

It might seem like every lender has tighter restrictions post-housing crisis, but things are starting to lighten up. Lenders are taking a few more risks and giving more people home loans. One entity that has not quite lightened up very much are the banks, though. Prior to the housing crisis, they already had tighter restrictions. They always required higher credit scores, lower debt ratios, and did not allow special circumstances. Fast forward to today and the restrictions are even tighter. Banks usually sell to the secondary market, meaning Fannie Mae or Freddie Mac. This means they must abide by their rules. In addition, many banks add their own rules to make things even safer. If you have any odd circumstances on your mortgage application, a bank might not be the best choice.

Click to See the Latest Mortgage Rates»

Nonbank lenders usually have many more options. They may offer FHA loans, portfolio loans, or even subprime loans. There are nonbank lenders located throughout the country and with the internet, you can apply with any of these lenders. This takes away the need to stick with the bank you have done business with since you were 16 years old. Get out there and find out what other programs are available to you. Even if you have good credit and a low debt ratio, it isn’t a bad idea to check things out – you never know when you will find a better rate or program.

Down Payment Requirements Differ

Banks and nonbank lenders usually have very different down payment requirements. Don’t get us wrong – 20% is always best. However, there are many programs today that offer lower down payment requirements. FHA loans are a great example. You only need 3.5% down to qualify for this program. Your local bank, on the other hand, will more than likely require a 20% or higher down payment. They usually reserve their loan offerings for those with large assets. This way they reduce their risk and meet the guidelines of the secondary market.

Nonbank lenders will accept borrowers with a large down payment, but they usually do not require it. They often have many programs at their disposal, including government-backed and subprime loans. Obviously, the more money you put down on a home, the better interest rates and programs you will be offered, but it is not a necessity today.

Speed of Processing Varies

If you are in a hurry to secure a loan, banks may not be the right choice. They often have longer wait times, even for a pre-approval. Remember that mortgages are not the only vehicle your local bank offers. Because of this, your request will go into a queue and the bankers will get to it when it is your turn. This could mean a few days. If you are waiting to bid on a home or provide proof of financing, this could cause you to lose your bid. Using a bank for a mortgage should only be done when you have the time to patiently wait.

Nonbank lenders often provide preapprovals within a few hours of the application. They are also always processing and pushing loans through the process. This is the only product they offer, so they can focus 100% of their attention on the mortgage applications. They also usually have automated systems provided to them by the entities offering the loans, such as the FHA and USDA.

Different Approaches

Banks tend to take a one-size-fits-all approach to mortgage lending. This leaves many borrowers out of the equation. Here is an example:

Johnny has a 640 credit score and a 29/37 debt ratio. These factors are usually slightly below the conventional guidelines. However, Johnny has 18 months of reserves in a liquid investment and has held the same job with steadily increasing income for the last 5 years. These two factors should make up for the risk his lower credit score and slightly higher debt ratio pose.

A bank would look at this situation and likely turn Johnny down. They do not look at his compensating factors and see that they really make him less risky. They do not look at his credit history and see that he has never made a late payment or that he pays well more than his minimum payment on his credit cards. They use the standard qualifying factors and decline him for the loan.

A nonbank lender, however, would look at this situation like a human, not a computer. They would see the compensating factors and figure it into the equation. They may ask Johnny to make a higher down payment than just 3%, but they will likely have a program for him that allows Johnny to purchase the home he wants.

Nonbank lenders also offer a different approach regarding interest rates. Banks do the one-size-fits-all thing again. They have one rate and that is it. If you do not fit the mold, you do not get the loan. If you do get the loan, you get the interest rate that everyone else gets. There are no rewards for great credit, low debt ratios, or high down payments.

Nonbank lenders customize their interest rates based on the individual factors. This makes it much easier to get a lower interest rate and save money over the course of 30 years.

Banks and nonbank lenders have many differences, but they both offer loans. The best way to approach your need for a mortgage is to shop with both. See which one offers you the best rate and terms. Do not focus strictly on the interest rate, but on the cost of the loan over its entire life. If you have odd circumstances, make sure you focus on nonbank lenders, though. A bank may turn you down, but a nonbank lender will likely have a program. If banks were the only option for mortgage lending, there would be much fewer homeowners in our country. Take the time to do your research and shop around to find the best program for you.

Click Here to get Matched With a Lender»

How Long do you Have to Pay Mortgage Insurance?