Tag Archives: mortgage insurance

Same Name, So Many Types

Insurance … that covers a lot of area – from car insurance and liability insurance to health insurance and homeowner’s insurance.  There are a lot of insurance types out there and when you buy a house, there are a few you need to be familiar with.

My previous post discussed mortgage insurance.  This type of insurance may be required on your loan if you have less than 20% down with conventional financing or if you’re doing FHA financing.  It insures the lender in case you default and doesn’t cover you for anything.  Mortgage insurance is factored into your monthly house payment.

Flood insurance is another one that could possibly become something you need to understand.  Lenders will “pull” a FEMA (Federal Emergency Management Agency) flood certificate on all properties prior to financing them to confirm the house is not in a flood zone.  If it is in a flood zone, flood insurance will be required to be part of your house payment.

Title insurance is necessary for any loan that is being done in Minnesota.  There are two types of title insurance.  One is called lender’s title insurance which insures the lender in case any other liens come up against the property.  As lenders, we want to be in first lien position so if other liens arise, we are paid first.  Lender’s title insurance is paid by the buyer at the time of closing and the amount varies by title company, loan amount and purchase price.

The second title insurance out there is called owner’s title insurance and this would protect you.  It is optional and the cost is based on purchase price and loan amount, as well as the title company you’re using.  This is a one time fee paid by you at closing, so it’s not something that is “renewed” year after year.

Though you aren’t in a lien position, you may want to be protected if liens come up that weren’t incurred by you. When purchasing a home, one of the jobs of the title company is to search public records on the address you’re buying.  They want to make sure no liens exist so they can pass free and clear title to you.  If there are liens, the seller is responsible to pay these off at closing.  No one is perfect, so there could be liens out there that the title company doesn’t find as they may be improperly recorded at the county.  Liens follow the property address, not the person who incurred them.  So, when you go to sell or refinance and a new search is done, something could come up like this and you would either need to pay it off, go to court to fight the lien if it’s not yours or when you purchased, if you had bought the owner’s policy, you may be protected for instances like this.  Talking to a title company is the best way to learn more about the owner’s policy and their specific coverages.

Finally, there is homeowner’s insurance.  This is a little confusing because it actually is known by a few other names – hazard and property.  They all do the same thing – insure the property we will be lending on.  And lenders want to make sure the property is adequately insured.  The amount of coverage requirement will vary by lender and loan type so you will want to check with your lending institution.

Homeowner’s insurance is billed annually, and in many instances, will be part of your house payment depending on the loan type you’re doing and your down payment amount. It’s your responsibility to set up your annual policy with an insurance agent of your choice prior to closing.  The amount they charge will be part of your payment, and if you escrow your insurance in your payment, the renewals will be paid by the lender in the future on your behalf.  This annual premium amount is broken down to a monthly amount and added to your house payment.

What if you purchase a townhome or condo and the insurance is covered in your association dues? Do you need homeowner’s insurance in that instance?  The answer to this varies.  Most associations have insurance that covers the structure, so if it were to have damage, their coverage would insure that loss.  However, these policies don’t always cover cupboards, carpet, bathroom fixtures, etc., also known as “walls-in” or “all-in” coverage.  If they don’t have this, then you would need to purchase this policy, typically called an HO-6 policy and it would be included in your payment if the loan type you’re doing requires this.  If “walls-in” or “all-in” is part of their policy, then you wouldn’t need it for loan purposes, BUT, you will still want to purchase it to protect your personal belongings!

As you can see, when it comes to buying a home, there are a lot of insurance types to be familiar with. It can get a little confusing.  Hopefully, you will work with a lender that will help educate you on the requirements specific to your loan type.  As with ALL insurance related questions, please reach out to the appropriate provider or expert to answer questions you might have for your situation.

A Necessary Evil and A Little History Lesson

If you are like many people buying their first home, or subsequent home, it may be tough to come up with a large down payment or much of any down payment. Whether it’s just hard to save, debts are too high or you aren’t realizing enough equity from the sale of your home, down payment savings are tough to allocate.

Ideally, a 20% down payment is the goal to shoot for in order to avoid PMI or MI– private mortgage insurance or mortgage insurance. Reality is, most people, just don’t have that, so they must contend with the necessary evil of paying for mortgage insurance in their house payment.

But is PMI/MI really all that bad? First, let’s look at some history of down payments.   In the early 1900’s, down payments were commonly 40%- 50% for conventional financing – wow!  Of course, a house back then, may have only cost $5,000 – so $2,500 doesn’t seem like that big of a deal, BUT when annual incomes were approximately  $600-$700/year, that made coming up with that money hard, maybe even impossible

To help stimulate the economy, in 1934, FHA (Federal Housing Administration) came along with an alternative to conventional’s large down payments – they offered a minimum down payment.  With it, they charged mortgage insurance on an annual basis (factored monthly into the payment) and also collected an amount upfront called the Upfront Mortgage Insurance Premium (UFMIP), which is financed into the loan.  Throughout the history of FHA, the required down payment, annual MI and UFMIP amounts have adjusted to FHA’s needs (government loan type).

In the late 1950’s, conventional financing wanted to get in the game and make housing more affordable, so in came Private Mortgage Insurance companies (PMI). This insurance, paid for by the buyer, helped lenders feel more comfortable with smaller down payments.

So what exactly does PMI/MI do? Unfortunately, it doesn’t do anything for you.  It is all about insuring the lender in case you default on your loan.  If the lender has to foreclose due to non-payment, they can fall back on this insurance to help cover some of their losses.

With conventional financing, there are certain coverage percentages which differ with PMI depending on your down payment amount and your credit score. If you use a first time buyer program, with PMI, you may even have a lower percentage, thus a lower PMI payment.

FHA’s annual amount for MI doesn’t vary on the credit score. If you put more than 5% down, you will have a lesser annual/monthly amount for your MI.  Even if you put 20% or more down, you WILL still have the upfront and the annual MI with FHA.

What about getting rid of the PMI/MI? This differs by program.  With FHA financing, you can’t get rid of the MI – it will be on your loan the entire term you have it.  Only caveat is if you start with 10% down, the MI will eventually drop off.

With conventional PMI, it will automatically go away when you reach 78% loan to value (LTV) of the original value (purchase price) of your home – or 22% equity. Fortunately, with PMI, you can be proactive and attempt to remove this sooner than that.  There are essentially two opportunities, but ultimately, the servicer of your loan (company you’re making payments to) will be the decision maker here on whether they allow this.

First, your LTV must be at 80% or less of the original value based on your amortization or actual payments you’ve made.

Or second, if you can show with a new appraisal that you have the necessary equity required by the servicer, you could request the servicer to drop the PMI.  Ultimately, cancelation is still up to the servicer.

So, the necessary evil isn’t really evil at all – it’s really a GREAT opportunity for you to buy a home without needing 20% down, without having to scrape and save every penny you earn. And, if you’re eligible, you could even get assistance for that down payment with one of the many first time/subsequent home buyer programs available in Minnesota!

End result: the necessary AWESOMENESS is that you can get into a home sooner than later due to this little necessary evil!

Confused Over Insurance?

Insurance is necessary.  Let’s face it, things happen and it’s best to be prepared.  There is life insurance,  health insurance, car insurance, renter’s insurance,  insurance for our pets and we even have insurance for the gadgets we buy.  Insurance is big business because you’re paying for the “what ifs” that occur.  I certainly hope you never have to use insurance, but you’re always thankful when you have it.

As a homeowner, or soon to be homeowner, there are many types of insurance and they can be a little confusing.  Let’s examine insurance types the lender will require you to have in order to obtain financing.

ID-100259033Hazard insurance — also known as homeowner’s insurance or property insurance.  This will insure you against loss or damage to your home.  Lender’s require that you carry insurance for as long as you have a loan, though continuing to insure your home, as long as you own it, is advised.  The property serves as security for the loan and the lender wants to protect this security.  In most instances, your insurance will be included as part of your monthly house payment, but the insurance agent is your choice.  The benefit of this insurance is not only to protect your home, but it also protects your personal belongings (to what extent will be determined by your policy).

Private Mortgage Insurance — also known as PMI or mortgage insurance.  If you have less than 20% down using conventional financing, the lender can require that you carry mortgage insurance.  I say “can” as there are a few first time buyer programs that don’t require this insurance even with less than 20% down.  Unfortunately, this insurance does nothing for you.  It insures the lender in case you default on your loan.  The lender will choose the mortgage insurance company, though most PMI companies are priced similarily.  At some point, you may be able to remove this insurance from your monthly payment, if you meet certain requirements.

FHA loans always have mortgage insurance.  This is NOT PMI as it is not purchased through a private company.  FHA insures their own loans and the insurance is required on all FHA loans regardless of how much you provide for a down payment.  This also insures the lender in case of default and is included in your house payment.  The insurance will remain on the loan for the entire term of the loan when you take out a 30-year loan.

Flood insurance is another type of insurance the lender may require; however,  the chances that you need this are slim to none.  All lenders require a flood certification to prove the home they’re financing is NOT in a flood zone.  If it is in a flood zone, the lender will require you to carry flood insurance on the home.  This will also be part of your monthly payment, if required.

Title insurance — lender’s policy and owner’s policy.  The lender’s policy is required to be purchased on all transactions in MN.  The cost of this is determined by the title company with whom you close.  It insures the lender that they always have first lien position to the property, even if another lien comes up against the home. The owner’s policy is optional to purchase.  It is very inexpensive insurance and is highly recommended.

Insurance is complicated, yet necessary, and there are countless options.  The more you understand the options and requirements  that are available, the better you’ll understand the process of buying your home!

*Image courtesy of Stuart Miles – freedigitalphotos.net

Increased Payments on the Horizon with FHA Financing

Something is always changing with financing, especially with the ever-popular, government-backed FHA loan.  FHA stands for Federal Housing Administration.  They have been the icon for low down payment loans and allowing people with not-so-perfect credit the opportunity to get financing.  FHA works well with the many first time buyer programs out there, as well as their popular 203K loan — a great rehab loan to help fix up a home to the way you want it, or to make it habitable.

Per Congress’ mandate, FHA needs to keep their Mutual Mortgage Insurance Fund alive in order to continually insure loans.  And when I say alive, I mean they need at least a 2% reserve threshold.  Last year, FHA increased their annual mortgage insurance (MI) and decreased the Up Front Mortgage Insurance (UFMIP) in an effort to build the reserves back up.  After recent review, FHA realized another increase is needed with BOTH the annual MI and the UFMIP.

Starting with case numbers assigned April 1, 2012 or after, the new numbers will look like this:

  • Monthly MI will go from 1.15% to 1.25% (of the loan size)
  • The UFMIP will go from 1% to 1.75% (of the loan size)

In layman’s terms, what does this mean to you, the buyer??  Not a ton, BUT it will affect your payment.  On a $125,000 loan, your payment will go up about $15/mo with the combination of the UFMIP increase and monthly mortgage insurance increase.  Again, not a ton, but when you’re buying your first home, EVERY little bit makes a difference.

In order to get in under the old percentages, you’d need a purchase offer accepted prior to April 1 so your loan officer can get a case number assigned from FHA.  It’s something that can usually be done the same day, but I don’t suggest waiting until the last minute to get the offer accepted if you really are adverse to the payment increase.

FHA will still continue to be a great option for home financing.  There is no doubt about it.  And for some people, or based on the shape of the home, FHA will be the ONLY option.  Alternatively, if you have good credit and meet conventional guidelines, you may want to consider conventional financing as this option will absolutely have a lower house payment.  Again, it’s all about what you qualify for in terms of credit and if the home needs work or not.  Sometimes, conventional financing isn’t an option.

To find out more about YOUR options, what first time programs you’re eligible for or to find out what you qualify for, please don’t hesitate to give me a call.  My goal is to educate on the options and help you make the right financial decision … even if that decision is to not buy anything at all.