Tag Archives: PMI

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!

Dakota County + Conventional Financing = Happy Homebuyers

Shout out to our partners at the Dakota County CDA!  For as long as I can remember, they have only allowed FHA or VA loans to be used in conjunction with their MN first time home buyer program.  They now allow a 30-Year fixed conventional financing option via the HFA Preferred conventional program and this is great news.

As a refresher, all MN first time home buyers must qualify for a basic loan program — FHA, VA or conventional financing.  I look at this as the cake.  As long as you meet the parameters for credit, income and assets for the specific program, you can qualify for your loan — the cake.

One step further, if you meet the parameters of the first time home buyer program, such as the one in Dakota County, you could then get down payment and closing cost assistance — which is the frosting on your delicious cake!  Now wouldn’t that be sweet?

There are guidelines for the conventional loan that must be met in order to qualify.  First, ID-10039817there is a minimum credit score of 640  to even be eligible for the Dakota County  program.  The required down payment is at least 3% and you must contribute $1000 of your own money (no gift) to the transaction.

Since you have less than 20% down, you will be required to have private mortgage insurance, also known as PMI.  The good news is that the PMI for this first time buyer program has reduced coverage requirements which may result in lower monthly PMI payments.

You can learn more about the Dakota County program here, but as a quick recap, they offer three different down payment options.  These are dependent on your household income, but range from 3.5% of the purchase price (max of $7500)  up to 10% of the purchase price (max of $10,000).  As with all MN first time home buyer programs, the assistance is a second loan against your property.  If you sell or refinance your home, the second loan becomes due and payable.

Another requirement for this program, as with other MN first time buyer programs, is to attend the Homestretch class.  This is a worthwhile, 8-hour class that will teach you everything you need to know about buying a home, the process, as well as keeping your home.  You can find classes at the Homeownership Center. Costs for these classes will vary on the location you choose, such as directly from Dakota County or another provider.

I am an advocate of the in-person class because you can learn so much from other attendees.  If it doesn’t work in your schedule, you can “attend” the class online via their Framework class.  If you go this route, you will also need to set up a one-on-one meeting with a first time buyer specialist at the Dakota County CDA.

I am excited we can now offer conventional financing with Dakota County.  They have a wonderful program and for those of you with higher credit scores, it may be a much better financial option to FHA financing in terms of your monthly payment.

As always, it would be a pleasure to discuss your situation to see which cake you qualify for and what type of frosting we can layer on top!

*photo courtesy of  Salvatore Vuono, freedigitalphotos.net

 

MN Housing Makes a Few Changes

So many of my blogs have to do with MN Housing and their great programs.  It’s true, I love working with MN Housing.  They have fantastic programs for MN first time home buyers and even NON first time home buyers.

They offer quite a few different assistance programs to help buyers with down payment, as well as closing costs.  They even offer a conventional loan program with just 3% down and NO monthly private mortgage insurance (PMI).  That’s a huge savings — and another blog post!

up down arrowAs with all MN first time home buyer programs, there are income limits and purchase price limits.  To be eligible for these programs, you need to fall under the household income limits.  These limits have just been revised DOWN a tad.

The new income limits for their Start Up, Step Up and MCC programs have been revised:

  • $82,900  1-2 person household
  • $95,335  3+ person household

Household income is calculated differently depending on the program.  The Start Up program looks at ONLY the income of the people on the loan.  If the person is married, and the spouse is NOT on the loan, the spouse’s income is STILL counted.  All income is counted, even if the lender isn’t using it for qualifying.  For instance, if the borrower gets overtime, but it’s been less than a 2-year history, the lender will not use this in qualifying.  BUT, the income must be calculated for household income purposes.

The Step Up program uses “qualifying income” for the household income.  That means, if the spouse is not on the loan, their income is NOT calculated.  It also means if we don’t use overtime, like in the example above, then that income isn’t used in calculating the household income.  The benefit to this is more people will be eligible for this program!!

As a point of differentiation, MN Housing actually has TWO programs under Start Up which have DIFFERENT income limits than the above.  These limits have not changed and can be found at their site.  The respective programs are the deferred payment loan and the Home Help loan.

They made another change to the purchase price limits.  The maximum price of the property has been increased to $310,000 for the 11-county metro area.  This means if you purchase a home for $310,001, it will disqualify you for the MN Housing program — just make sure you purchase it for $310,000 and you’re golden.  Less is good too!

As with all programs, guidelines change.  That said, some of my older blogs may reference income limits or purchase price limits that are out of date.  Please always check with me, or the respective first time buyer site, on the current guidelines to make sure you’re eligible for the program you want!

FHA, PITI and LTV … Oh My!

If you’re looking to get financing for a home, you’re probably hearing a lot of acronyms flying around.  The mortgage industry is famous for them; but if you’re new to this process, they can be a little confusing.  As I was sitting here working on my RD loan, I started to think that maybe a little explanation might help.

IMG_1283Let’s start with my “RD” loan.  RD stands for Rural Development and is a great loan that requires NO down payment.  There are certain restrictions for this loan type — the home needs to be in a rural area, as determined by the RD website, and there are household income limits.  RD is like VA, in that VA doesn’t require a down payment either.

VA is the Veteran’s Administration.  This loan is specifically for a veteran of the armed forces.  They could be in the reserves or active.  We get a COE – certificate of eligibility — to prove a borrower is eligible for this type of financing.  This is the creme de la creme of all loans.  Literally, the seller could cover all costs, making it so the veteran needs nothing out of pocket.  Also, there is no PMI on this type of loan, making payments lower.

PMI stands for private mortgage insurance.  This is required on all conventional loans with less than 20% down.  PMI doesn’t insure you, but insures the lender in case of default.  This is part of your house payment and will automatically go away after you reach 22% equity.

Speaking of conventional financing – meet Fannie Mae (FNMA) and Freddie Mac (FHLMC). Fannie Mae is the Federal National Mortgage Association and Freddie Mac is the Federal Home Loan Mortgage Corporation.  They purchase conforming loans — loans that are under a $417,000 loan amount and “conform” to their guidelines.  Typically, a conventional loan has a little more lenient appraisal process than FHA or VA.

What’s FHA?  It stands for Federal Housing Administration.  One of the oldest loan types.  FHA is a government backed loan and many first time buyers use this loan because it has the most leniency in credit scores and only requires 3.5% down.  Typically, FHA loans have a lower rate than conventional financing and usually is a little more lenient with DTI.

DTI stands for debt-to-income.  In the lending world, we look at numbers called ratios to determine your qualifications.  The debt-to-income ratio looks at your monthly debts in relation to your gross monthly income (before taxes) to determine the PITI you can qualify for.  Ratio limits vary by loan type.

What’s a PITI?  a.k.a. PITI-A.  This is what your house payment is comprised of — principal & interest on the loan, property taxes, insurance (HOI & PMI) along with adding a possible “A,” which are the association dues if you buy a townhome or condo.  You’d pay dues separately to the association.

Homeowner’s insurance, a.k.a. HOI, is the same as hazard insurance and property insurance. This insurance is required for your home in case of loss.  This is something you set up with your own insurance agent.

And last, well, certainly not the last acronym in the mortgage world, is LTV.  This means loan-to-value.  For instance, if you put 5% down, you would have a 95% LTV.  The maximum LTV is determined by the loan type — VA and RD are 100% LTV, FHA is 96.5% LTV and most conventional loans have a max LTV of 95%.  To avoid the PMI on a loan, you need an 80% LTV.  The LTV drives the interest rate, the cost of your PMI and may even determine if you get a loan approval or not.  It’s a very strong acronym in the lending world.

Like I said, that wasn’t the last acronym and I am sure there are more that I failed to mention.  These are the important ones and hopefully, you now have a better understanding of the part they play in your financing.

It would be my pleasure to help you muddle through these acronyms and educate you on the process of buying your home!  TTYL!!

 

Is PMI Really That Bad?

Did you hear about AIG being bailed out by the government?  Okay, this is really old news; but it reminds us of the “horrible” acronym tied to some conventional loans … PMI.  I’m hear to tell you that this three-letter word isn’t such a bad thing.

riskPrivate Mortgage Insurance, known as PMI, is just that, insurance.  It’s not insurance you “choose” to purchase or shop around for and it isn’t coverage for you or for making payments on your mortgage in case you die.  It’s insurance for the lender/investor to protect their investment — your loan — in case you default.  On conventional loans, PMI is required, in most cases, if you have a down payment of less than 20%.  I say “most cases” because some lenders will do financing without PMI, but there is typically an interest rate premium paid for avoiding this.

For most, PMI represents a portion of your PITI payment (Principal, Interest, Taxes and Insurance (both homeowner’s and PMI).  There is also  BPMI  — Borrower-Paid Mortgage Insurance.  In this scenario, the borrower pays for the upfront amount at closing.  This is also done to avoid having PMI as part of the house payment.  Either way, PMI is being purchased to cover this loss.

And so you know, PMI doesn’t cover the whole loss.  Coverage requirements are dictated by your down payment amount.  According to Fannie Mae or Freddie Mac guidelines, if you had 15% down, the coverage would be around 12% of the loan.  Alternatively, if the down payment is less, like 5% down, the coverage requirement will increase to 25-30%.  For example, if the loan is $100,000 with 5% down, you would be required to have 25% coverage or $25,000.  In case of default, the PMI company pays the lender $25,000.  That’s a lot of money.  No wonder AIG took a fall, or a few.  They were one of the PMI companies that chose to insure higher risk loans — and I’m not talking about less down loans, but those that had other risks as well, such as lower credit scores or recent major derogatory items like bankruptcy.

But you’re a good risk, make your payments on time — why are you being penalized for the bad eggs?  Valid question, but it all plays into historical data.  And history shows that people with less down payment are more likely to default.  When you have “less skin in the game” and things go South, you’re more apt to walk away than try to salvage the equity you have.  I equate this to car insurance.  If you’re male and 21, you’re car insurance is higher than a 21-year old female.  Why?  They have more accidents, thus, a higher risk.  So, the premiums are higher.  And insurance is all about risk.

So why would PMI be a good thing?  I have a few reasons, kindly provided by MGIC, one of the PMI companies we use.  All of the companies that provide this type of insurance offer similar rates, but they may have different guidelines or requirements that make one better than the other.

  • It’s affordable.  Okay, so why is this a good reason?  Recently, FHA  increased their monthly mortgage insurance premiums, making them 1 1/2-2x higher than conventional.  And, they charge an upfront premium that’s rolled into your loan.  This is not to say FHA isn’t a good loan.  More, it may make more sense to use conventinonal financing if you have the credit to do so.  Most people use FHA due to lower scores (doesn’t equate to “bad”) , like under 660.
  • It’s not forever.  Not the best argument because FHA mortgage insurance isn’t either.  BUT, as long as you pay the PMI for two years, have on-time mortgage payments AND can show you have 20% equity via a new appraisal, you can discontinue it.  FHA, on the other hand, requires you to have the mortgage insurance for at least five years and you must have 22% equity of the ORIGINAL PURCHASE PRICE, which doesn’t take into account appreciation.

Oh, and another way to avoid PMI altogether is to do a “piggy-back” loan or second loan.  You would put 10% down, get a second loan for your other 10%, which would make up your 20% down, thus avoiding the PMI.  Your payment would be a little less than having PMI, but there are other challenges getting the second loan.  Doable, but not for everyone.

Nutshell — PMI isn’t all bad.  If it weren’t for PMI, we couldn’t do 3% down — or less than 20% for that matter.  Do you have that much saved?  I don’t and that’s another blog for another day.

Coming April 18th — FHA Payments Going Up for Pre-Approved Buyers

MONEY STEPFHA is trying to re-build its reserves again.  Back in October 2010, FHA lowered their UFMIP (Up Front Mortgage Insurance Premium) from 2.25% to 1% to somewhat offset the increase in the monthly MIP (Mortgage Insurance Premium) from .5% to .9%.  This certainly didn’t help FHA buyers with their monthly payments.  It made it so a buyer couldn’t qualify for as much home.  And it took the argument away that FHA has a cheaper payment than conventional financing because the mortgage insurance is less.

So, why did they do it in the first place if it negatively impacted the borrower?  It was necessary.  FHA is required to keep reserves as a government program.  They have paid out, like many conventional PMI (Private Mortgage Insurance) companies, insurance claims to lenders when FHA insured homes go into default.  Unfortunately, they are still under the 2% reserves they are required to have and again, have to increase the MIP.

With case numbers* dated on or after April 18th, be prepared to see your FHA payment rise if you’re in the buying market.  This monthly figure in your payment will go from .9% to 1.15%.  On a $150,000 loan, that makes a $30/month difference.  For some, this may halt a transaction in its tracks.  This isn’t what anyone wants.

Unfortunately, you can’t change when you get an offer accepted.  The advice I can give, especially if you’re tight for qualifying, is to find a home sooner than later and get your purchase agreement to your lender ASAP.  It doesn’t take much for them to order the case #, but it will be a huge bummer if it doesn’t happen.   And, believe it or not, conventional loans, if you qualify, may actually have a lower payment for mortgage insurance — making the argument now favor conventional financing.

Still, some buyers will HAVE to use FHA.  Why?

  • FHA is more lenient on credit scores and allows for “creating” alternative credit.  So, if you don’t have a credit score, you could get FHA financing combined with a first time buyer program.  As of now, the first time buyer programs only require 620 for the mid-score using FHA financing.  Conventional financing will require a higher figure — 680+, if not even 720 or higher.
  • FHA also allows non-occupant co-borrowers to help qualify for the loan.  Let’s say part of your income is salary and some is commission and that income started a year ago.  Though you know you can count on it, lenders won’t for qualifying.  Commission income requires a 2-year history to establish a pattern.  Other income of this nature would be tips, self-employment, bonus and overtime.  Without 2 years, you can’t use it to qualify.  However,  if you had a family member co-sign with you, your qualifying ability could increase.  Keep in mind, my assumption is your family WON”T be paying your house payment, so you still need to use your head and stay within a payment range in which you’re comfortable
  • Did you know FHA offers job-loss protection?  I bet many people, including financing professionals, don’t know this.  If you can’t make your payments due to a job loss, FHA could pay up to 12 months of your house payment to your lender so you don’t fall behind.  The amounts you get will be added to your loan on the end — FHA is nice, but not that nice!
  • Another reason people may choose/need FHA financing is for rehab.   A loan type, called the 203K loan, offers rehab assistance that is added to the purchase price.  You still pay a lower amount for the home, but we add the fees and repair bid to the purchase price.  Your 3.5% down is figured on that higher number.

Long and short — if you have to do FHA, I suggest getting a purchase agreement prior to April 18th.  Otherwise, prepare to pay the price when the 18th rolls around.  So stop waiting for something  better to happen with the market.  It’s not going to happen.  Get pre-approved and get out there and look!

*Case number — a number assigned to a loan and a property address.  Lenders enter the property information into the FHA system, which then generates this number.   It’s like a social security number for the house.  If the current borrower doesn’t buy the home, and another person does using FHA financing, the case number will still attach to the address.  This also means if an appraisal was done, the appraisal sticks too and is used by the new lender.

Feeling Left Out in the Cold with No Zero Down Program?

For a short time, we were fortunate to have a true zero-down payment loan thanks to MN Housing.  Well, last week, MN Housing chose to stop offering these loans.  Here is what they had to say in their enews note:  “Under the direction of its regulator, the Federal Housing Finance Agency (FHFA), Fannie Mae has discontinued the HFA Affordable Advantage initiative.”  So, this isn’t just MN Housing saying no-way to keeping this program alive; it’s Fannie Mae.

cold womanWas it too soon to bring back such a risky loan in our current mortgage atmosphere?  I think many people thought that zero-down loans were the cause of the fall and the start of the so-called “mortgage meltdown.”  I have opinions on this, but my assumption is these loans are not to blame.  The loans that didn’t perform were those that were made to risky and not-so-credit worthy buyers.  It’s true, many of these loans were zero-down payment loans, but they had the added risk of being an adjustable rate loan (ARM).

How most people financed these loans was to do a first loan at 80% of the value of the home, avoiding private mortgage insurance (PMI), and adding a second loan for the 20% down, thus not having any “skin” into the deal.  Pretty sure their  loan officer said something like — work on your credit for the next two years, then you can refinance and get a fixed market rate.   Unfortunately, there was a double-whack that occurred when home prices dropped.  First, these people didn’t have equity in their homes to refinance and second, they were stuck in adjustable rate loans that adjusted to very unfavorable rates.  That was the risk and a primary part of our current mortgage state of the union.

Don’t feel left out in the cold.  It’s not all doom and gloom if you didn’t get to use the zero-down program.  There are plenty of programs available.  For most, we’ll  just go back to the way things were a few months ago — doing FHA financing with 3.5% down.  The seller can still pay up to  6% of the sale price toward closing costs, so maybe you only need the down payment.  Or, maybe you’re able to get first-time buyer assistance, which is still available and then you might only need $1000 of your own money.

So put on your happy face and bundle up, ’cause there’s plenty of home buying opportunities and even more programs to take the chill out of needing down payment!

Tips & Tidbits: Let Me Introduce the Cheapest Insurance Out There …

If you’re in the loan process right now, your head is probably spinning with all the new information.  Throw in there a lot of references to insurance — insurance for the home (aka hazard insurance), for the mortgage company (aka PMI or MI) and title insurance.  Oh, and to confuse the matter more, you can actually purchase mortgage insurance on your loan (in case something happens to you, the loan will be paid).  What the heck is the deal with all these insurances and what is really protecting you?

I am so glad you asked.  Let’s just start with some explanatory definitions, then I will get to the meat of this.  Homeowner’s Insurance is insurance that covers your home and the contents in case of a catastrophe or burglary.  As lenders, your house is our collateral.  If something should happen to it, we want to make sure you have enough coverage to replace your home.  This is a policy you purchase with your current insurance agent or one I could refer you to.

If you were to buy a townhome or condo, you may not need this type of insurance.  In most instances the homeowner’s association covers that with the owner’s association dues.  There are some changes that have occurred with investors in regards to requiring a separate policy.  If the association’s insurance policy only covers “studs out”, then you would need to buy a special policy called a HO-6 — basically, this will cover the “studs in”, which means, all your personal belongings along with cupboards, fixtures and appliances.  If the association does have the extra coverage, it is still advisable for you to get the HO-6 policy (just won’t be as expensive) to cover your personal belongings.  In this instance, proof of this would NOT be required at closing.

How about the “dreaded” Private Mortgage Insurance (PMI) on conventional loans or Up-Front Mortgage Insurance (UFMIP) with FHA?  First of all, it’s not something to dread; it’s reality.  And in this day and time with all the private mortgage insurance companies that had to pay on claims due to foreclosure, it will never go away.  In a positive light, it allows you to do a minimum down program.  Anyway, the purpose for mortgage insurance is to insure the lender in case of default.  You remember AIG???  Who couldn’t forget the insurance  company that was bailed out … a few times, right?  They insured a lot of the high risk loans that were done in the past years.  No wonder it’s harder to get this type of insurance.  Only in the last few months have the PMI companies “let loose” a little to do 3% loans.  UFMIP is for FHA loans.  FHA is self-insured.  They have an up-front amount that is financed into your loan amount, as well as a monthly amount for insurance — which is lower than conventional insurance.

Last, at least the last I intend to address, is Title Insurance.  This is the CHEAPEST insurance you will ever purchase.  There are two types of title insurance — lender’s and owner’s.  The lender’s policy is required to be purchased to insure the lender that they are in first lien position.  One of the title company’s jobs is to search public records at the county to check for any liens.  The title company can only find what is correctly recorded.  You have the  option to purchase a  policy for yourself, called an owner’s policy.  This protects YOU in the event any liens were to appear against the property that you didn’t incur.  For instance, let’s say that a few owners ago, a new roof was put on the home and the owners didn’t pay the contractor.  In order for the contractor to make sure he gets paid, he placed a lien against the home YOU’RE purchasing.  If recorded correctly, the title company will find this and require the seller to pay it off to give you free and clear title.  If, however, someone made a mistake at the county, then it may not show up.  Bummer deal is liens follow the address, NOT the person who incurred them.  Five years later you decide to sell and wah-la, a $5000 lien appears.  Hmmm — what to do?  You have a few options — pay it (cheerfully I’m sure 😀 ), go to court to fight it or … drum roll please … at closing when you purchased your home, you purchased owner’s title insurance.  With this insurance, you pay ONCE, at closing, and it covers you for the ENTIRE time you own your home.  This insurance depends on the loan amount and sale price, but for first time buyers, it won’t be much more than $200 or so.  Paying just $200 to save $4000.  No brainer.  The two real estate attorneys I trust would NEVER let their clients close without it.  They spend way too much time fighting in court for other clients that don’t have the insurance.  Unpaid work is just an example of a type of lien, but there are more “opportunities” to have to use it — heirs to a property, divorce situation, many things that may put a  person in title to the home YOU own.

The long and short — there are many types of insurance during this process.  The only one you have the CHOICE to purchase is the owner’s title insurance.  It’s a necessary, but cheap, evil and well worth the investment.  Just do it!

The FHA Changes are Coming; The FHA Changes are Coming!

Let’s get on our horse and ride out of here before all you-know-what breaks loose with the coming FHA changes.  Okay, that’s a little dramatic … more like a lot dramatic.  Let’s get a grip on reality.  First of all, if you don’t know it, FHA is known for minimum down payment loans.  Right now, and with no change in sight, their down payment requirement is 3.5%.  Being that FHA is federally backed, they have lots of rules and stipulations to follow.

How about we get the “bad” news out of the way first. Please note the quotes. Any FHA loan requires something called Up Front Mortgage Insurance Premiums (UFMIP). FHA is self-insured which means they don’t use private mortgage insurance companies (PMI) to cover a portion of their risk if the loan defaults. This UFMIP is financed into the loan size which is currently equal to 1.75% of the loan amount. The change?? Starting April 5th, they will be increasing that to 2.25%. Why the increase? FHA has had to take a lot of losses due to the high foreclosure rates. They are supposed to keep 2% in their funds for this insurance — they are down to 1/2% — ouch. Hence the increase. So what does this mean to you? Not a lot. It’s about a $5/mo difference in your payment, depending on your loan amount. Calculate that out. $5/mo over year is $60/year and let’s say you live there 5 years — so $300. Doesn’t that seem so piddly? Imagine though that most loans that have been originated in the past 2 years have been FHA. That adds up fast!

This next change is so lame because it will neither help or hurt anyone. Why they have it is beyond me. Currently, FHA doesn’t have a minimum required credit score. The new rule requires buyers with a 580 score or less to put 10% down. OMG, 10% down. Bet you’re questioning what I said regarding a 3.5% down payment from my earlier comment. Reality — it’s a mute point. No investor buying an FHA loan will take a buyer with a score under 620 and some investors are moving toward 640. So, can you say lame with me???

Here’s the doozie that WILL affect you — we just don’t know when. They are predicting Spring/Summer. As of right now, FHA allows the seller to pay up to 6% of the sale price toward your closing costs and pre-paid expenses. Hitting us like a brick in the head, they will be reducing this to 3%! This is huge. Typically, asking the seller to pay 4-4.5% of the sale price gets you what you need. Though the lower the sale price, the higher the seller paids percentage needs to be due to the fixed closing costs that aren’t tied to the loan size. In real terms, instead of just needing 3.5% down payment, you will need to up your investment to about 4.5-5%. Yup, this is really going to hurt in the pocketbooks and savings of the buyers. It’s putting FHA on par with conventional financing which has always limited seller paid costs to 3% (with less than 10% down). FHA does allow gifts for down payment and closing costs.

And, not all changes are bad! Here is the good news — phew!  Of course only 25% of the changes are positive.  Well, that is a bummer.  We just have to deal.  For instance, this change has been effective since Feb. 1.  FHA has temporarily suspended the anti-flipping rule. The term “flipping” has quite a bad rap.  It’s really due to people buying a house at less than market value and turning it to sell for more when the buyer did NOTHING to it to warrant the additional increase in price.  This term gets tossed around like a salad — “I want to buy foreclosed homes and ‘flip’ them” — Whether it’s from friends, the media or even those programs on TLC, almost everyone gets the concept.   The rule, which is suspended for ONE year, said that a purchase agreement on a home HAD to be 90 days away from the date the title transferred to the seller. Whoopie, right? Why is this even important to you?   It’s opened the door to many more homes that you, as an FHA buyer, can actually put in the running.

That’s about it in a lengthy nutshell! To recap, the two major changes you need to be excited/concerned about is the removal of the anti-flipping rule which is in effect now and the change in seller paid costs with an effective date in Spring.  Just stay tuned for more updates as they come.  And let’s get off our horses and actually enjoy what has changed for the better and sweat about the projected changes when they come.