Money Saving Mortgage Insurance Options
Mortgage insurance is something that most first time home buyers are going to have to deal with.
If you’re coming to the table with anything less than a 20% down payment (or equity) this will affect you.
There have been many changes to both FHA and Conventional on this topic since this article was published.
Some changes to FHA insured loans are for the worse, while many other changes with private mortgage insurance are better for home buyers.
You might be surprised at how many options you have with Private Mortgage Insurance (PMI).
FHA vs Conventional
FHA guaranteed loans require mortgage insurance (MIP) regardless of loan to value. Private Mortgage Insurance (PMI) is required on any conventional home loan over 80% LTV (loan to value).
FHA home loans require that you pay two mortgage insurance premiums for all borrowers.
- UFMIP – An Up Front Mortgage Insurance Premium is equal to 1.75% of the amount of the loan being borrowed as of the writing of this article. The UFMIP can be financed into the loan and increases the principle balance of the loan by 1.75%.
- MIP – For loans with less than a 5% down payment, an annual Mortgage Insurance Premium equal to 1.25% is calculated on the new loan amount (if UFMIP is financed into loan) then divided by 12. This premium payment is then added to your monthly mortgage payment.
Private Mortgage Insurance
You may be surprised at how many cost saving alternatives to FHA are available to home buyers.
Recently, PMI companies have modified underwriting guidelines to automatically qualify a borrower that receives a DU automated underwriting approval.
PMI recently started allowing borrowers to qualify down to a 620 credit score, which makes PMI an even better alternative to the high cost of FHA.
Private mortgage insurance typically does not include an upfront premium. Premium rates are calculated based on Loan to Value and Credit Score.
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PMI rates will vary from one provider to another, please consult your lender to check eligibility. Here are some of the most popular options for paying PMI.
PMI Payment Plan Options
- Borrower Paid – A home buyer with credit above 680 and a down payment of at least 5% could qualify for a monthly mortgage insurance payment which is half of what FHA charges.
- This premium is calculated based on the loan amount, and paid monthly in addition to the mortgage payment similar to FHA MIP.
- This is a great option if you’re pushing the amount you qualify for to have the ability to be more competitive in high demand markets
- Lender Paid – LPMI is also known as Tax Advantage Mortgage Insurance (TAMI) due to the fact that the lender rolls the cost of the mortgage insurance into the interest rate, making tax deductible as mortgage interest.
- Expect slightly higher interest rates with this program. For home buyers looking to push the limits of mortgage payment they qualify for, LPMI could give you that competitive edge you’re looking for in high demand real estate markets.
- Single Premium and Single Financed Premium – A single upfront premium means no monthly mortgage insurance payment! The premiums for this policy can get expensive with low down payments or credit scores toward the lower end of eligibility.
- Borrowers can pay a one-time lump sum payment, or if they don’t have sufficient funds at closing, Radian’s Single Financed Premium lets them finance their MI into the loan amount.
- Split Premium Mortgage Insurance – This program is similar to how FHA is broken down into an upfront premium and a monthly premium. This program is similar to FHA only in regards to structure, not cost. Options include splitting premium a reduced upfront and monthly premium.
Private Mortgage Insurance allows for as little as 3% down payment with a minimum of 5% of the purchase price contributed from the buyer’s own funds.
Ask an Expert
Exploring your options could save you tens of thousands in loan costs and hundreds of dollars a month off your mortgage payment.
When you hire a mortgage professional (not a mortgage call center), finding the right combination for mortgage insurance is an important part of what they will do for you.
Stay educated, be empowered.
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Have Questions or Comments?
Thanks for sharing, Scott. This is very useful information and there are reasons to consider conventional financing vs FHA. However, isn’t it true that it is simply easier to qualify for an FHA loan over conventional financing because their guidelines for approval are less stringent? Trying to determine the best way to ensure approval! Thank you
@Tami Anderson actually, FHA is harder to qualify for in terms of some property appraisal requirements, but a little easier if you have a higher debt to income ratio or credit scores below 740. If your debt to income ratio is 45% or lower, and your credit scores are over 700 – I would seriously look at conventional with private mortgage insurance. The mortgage insurance is much, MUCH cheaper and conventional allows as low as 3% down payment. It’s really all about the numbers – have your lender run both scenarios side by side so you can make an informed decision.