Mortgage Insurance—The Ins and Outs of Private Mortgage Insurance, Mortgage Insurance Premiums & VA Funding Fees

What You Need to Know About Mortgage Insurance?

In the following paragraphs we will explain what Private Mortgage Insurance, Mortgage Insurance Premiums & VA Funding Fees are and help you determine if a loan that requires those fees are appropriate for you and your family—or pursuing other options are your best choice!

In addition, we will explore ways that you can avoid Mortgage Insurance altogether—if that is what you desire.

If you are considering purchasing a home or refinancing—you can go to www.quickenloans.com or www.lendingtree.com along with local mortgage lenders in your area—to determine what loan will best suit you—and your family.  You can compare closing costs, APR's and Par rates to determine what loan will best serve your—and your family's long-term interests.

Private Mortgage Insurance, Mortgage Insurance Premiums & VA Funding Fees allow potential homeowners (and those who want to refinance) the opportunity to put down a lower down payment on a property (usually personal residence, mobile home or condominium) that they are interested in buying. 

 

If Private Mortgage Insurance, Mortgage Insurance Premiums & VA Funding Fees are used effectively you can put yourself and your family in position to manage your credit and finances in a manner that can lead to you accomplishing many of your and your family’s goals and objectives in a more efficient manner.

What is the Purpose of Mortgage Insurance?

For those who are unable to come up with a large down payment or those who otherwise prefer to put a lower down payment on their home purchase—mortgage insurance is usually in the cards. When a buyer can’t afford or chooses not to put a high enough down payment toward their home purchase is when Mortgage Insurance is the most appropriate.

Mortgage Insurance protects the lenders and/or investors—and possibly other parties from the possible default of a mortgage loan.   Either the borrower or the lender can pay mortgage insurance premiums—however as a practical matter it is normally the borrower (home buyer) who actually pays the premium.

Mortgage Insurance can be privately backed through insurance companies (PMI)—or government-backed through programs such as the increasingly popular—Federal Housing Administration (MIP)—or VA loans (VA Funding Fee).

 

Private mortgage insurance (PMI), otherwise known as lenders mortgage insurance, is the most common type of mortgage insurance.

 

If the down payment is less than 20 percent of the sales price or appraised value of a home, the buyer is usually responsible for paying private mortgage insurance.

 

What Are the Factors that Affect Mortgage Insurance Rates?  

Mortgage insurance rates can vary widely. The main factors depend on the type of premium (PMI, MIP or VA Funding Fee), how much of a down payment is made and, most recently, a borrower’s credit score.

 

Many insurers are now offering credit-score based mortgage insurance, where a better credit score—equals better mortgage insurance rates.

 

Different mortgage insurance payment types are another reason rates may vary. The most common are where the borrower makes monthly payments.

Others can be paid up front or in full, and others are lender-paid.

Lender-paid loans are funded through a higher interest rate, which the borrower then pays—which in a sense is a misnomer as the borrower is still the one who ends up paying—in the end.

On a typical home loan that has mortgage insurance—the escrow account for the monthly housing payment would include the payment for the following:

1) principal

2) interest

3) taxes

4) insurance (homeowners)

5) private mortgage insurance (Conventional Loans) or mortgage insurance premium (FHA Loans)

If the mortgage insurance was financed into the loan amount as mentioned above—you would see a monthly housing  payment that included the following:

1) principal

2) interest

3) taxes

4) insurance (homeowners)

Note that you don't see a separate payment for private mortgage insurance—however the fee will more than likely be subtly rolled into the interest rate as a fraction of a percent over a 30 year period—and guess who will actually be paying it—and until now you would have been none the wiser! 

Therefore, don’t be fooled by loans that are advertised as  “No MI Required” loans—or “No Mortgage Insurance Required” loans.

With VA loans—the funding fee is usually financed into the loan—however it can be paid upfront at closing if you desire to do so.

In the following paragraphs we will discuss:

1) Private Mortgage Insurance

2) Mortgage Insurance Premiums

3) VA Funding Fees

We will conclude with other key points that you should be aware of—and end the discussion—with ways that you can avoid mortgage insurance altogether—if that is what you desire.

1) Private Mortgage Insurance

 

What Exactly is  Private Mortgage Insurance?

 

Private Mortgage Insurance or PMI is an insurance product that lender’s require on conventional home loans where the purchaser puts less than 20% down on the purchase price. 

Another way of looking at PMI is that it is a type of insurance available from Private Mortgage Insurance lenders that insures against loss resulting from default on a mortgage loan and the insurance can substitute for down payment money.

If 20% or more is put down on the property—there is no need to substitute for the down payment with insurance as most lenders are willing to accept the risk if they are only lending 80%—or less of the purchase price of an owner occupied home.

PMI is provided to lenders by Private Mortgage Insurers to protect them against loss if a borrower defaults (stops making mortgage payments as agreed to in loan agreement and foreclosure occurs).

If a loan of $200,000 is granted to a buyer and they only put 3% down—PMI would apply.

Qualifying ratios for loans that require PMI vary—but many are 28% on the front end (monthly housing debt as a percentage of monthly income) and 41% or higher on the back end (monthly housing and other debt as a percentage of monthly income).

The effect of PMI would be that your monthly mortgage payment would be higher (PMI would be financed into the mortgage loan amount or  a part of your monthly mortgage payment would include payment of PMI) than if there was no PMI unless the PMI was paid upfront at closing (depends on how the loan is structured).

 

Keep in mind that after a number of years—you can have PMI removed if you are at the right equity position with the value of your home. 

Therefore, it is important that you keep track of your payments on the principal of the mortgage. When you reach 80% equity, notify the lender that you wish to discontinue the PMI premiums.

Lenders are now required to tell the buyer(s) at closing how many years and months it will take for them to pay 20% of the principal to cancel PMI.

There are also strategies that you can use to eliminate PMI—and although they are now somewhat more difficult to implement you can still do so if you search around and you are in a strong credit and/or cash position.

An 80/10/10 or 80/15/5 loan that combines a 1st mortgage with a 2nd mortgage or Home Equity mortgage could help you avoid PMI. 

Keep in mind that there is the potential for your 2nd mortgage or Home Equity Loan to be higher than your PMI.

However, with the deduction of PMI on your tax return uncertain in the future at this time (Fall 2013)—the 2nd or HEL would provide you the comfort of knowing with certainty that you could deduct the interest on your tax return—within certain parameters.

Also, keep in mind regulations allow lenders to continue requiring PMI all the way down to 50% equity—for so-called high-risk borrowers.

NOTE: In the past, loans that were considered high risk include reduced documentation loans, in which customers provide less proof of income.

You may also be considered “high-risk” if you’ve sold multiple homes recently, you have been foreclosed upon, you have recently filed bankruptcy, or if you have inconsistent or undocumented income! 

 

In addition, loans for those with poor credit histories and higher debt-to-income ratios also fall into the high-risk category. 

The way that you can end PMI will be included in the mortgage loan documents that you would receive at closing—so be sure to safeguard your closing documents.

Quick Example of Monthly PMI:

$200,000 purchase price with 3% down would give you a loan amount of $194,000.  PMI is normally 1/2 of 1% of the loan amount —and in this case would be—$194,000 * .5% = $970.

$970 annual premium divided by 12 would give you a monthly PMI payment of:

$80.83 per month which would continue until you reached the equity position required by your lender—and you provided supporting documents to prove your equity position.

NOTE: Keep in mind that your PMI monthly rate will vary from that of the example above based on your credit position and credit score—and how the loan is structured.

80/10/10 PMI Avoidance Example:

$200,000 purchase price

80% first mortgage of      $160,000

10% second mortgage of  $20,000

Down Payment of             $20,000

 

80/15/5 PMI Avoidance Example:

$200,000 purchase price

80% first mortgage of      $160,000

15% second mortgage of  $30,000

Down Payment of 5%        $10,000

80/20 PMI Avoidance Example:

$200,000 purchase price

80% first mortgage of      $160,000

20% second mortgage of  $40,000

Down Payment of             $0

     

NOTE: Keep in mind that the availability and qualification for the above loans will vary based on your credit position and credit score—and whether you will qualify for the loan types above—based on today's lending environment.

Q: Who are loans that have PMI—appropriate for?

 A: Home buyer's who lack the required 20% down payment that it takes to avoid PMI—and those who are otherwise ready, willing and able to purchase a home.

PMI may also be appropriate for those who do have the required 20% down payment—but they choose to use the lower down payment—as part of an overall strategy to improve their long-term finances!

Q: How can I avoid or end the PMI premium?

A: You can avoid the fee by putting 20% of the purchase price down on the property (owner occupied residence) that you purchase.

You can also avoid the payment of PMI by purchasing your home with a cash offer—or doing an 80/20—80/15/5—or 80/10/10 piggyback loan mentioned above—through conventional lenders that still offer them.

You can end the PMI premium by getting to the equity position that is required by your lender
—and then asking your lender to end the premium (be sure you have documented proof of your equity position—an appraisal of several hundred dollars may be necessary—in some cases).

You may also refinance your existing loan into one that does not require PMI if you are at the right equity position—and your credit has improved over the last few years—or since you first took out the loan.

By reviewing your current loan documents and comparing loans of different companies—and knowing how long you plan to stay in your current home—you can determine if refinancing makes sense.

You can also utilize owner-financing—and other creative options to possibly avoid PMI—however be sure you know your risks!

Q: How does the mortgage lender benefit from this premium?

A: By you (purchaser) paying this fee—lender's are able to make more loans available—thus increasing the number of loans that they can pool together and sell in the secondary loan market—thus providing them the opportunity to make more loans—and ultimately increase their earnings.

Q: How do consumers  benefit  from this premium?

A: Consumers who desire to purchase a home can put down a lower amount and obtain a home loan at a competitive rate.

If done as part of an overall and comprehensive financial plan—consumers can put themselves in position to attain many of their financial goals—possibly in a more efficient manner.

 

Q:  Can I deduct this mortgage insurance on my tax return?

A: Yes, at the present time—tax year 2013—you can do so—however, Congress has not extended—or made permanent—this tax deduction as of October 2013.

  

2) Mortgage Insurance Premium

 

What Exactly is a Mortgage Insurance Premium?

 

Mortgage Insurance Premiums or MIP is an insurance product that lender’s require on home loans that are originated through the Federal Housing Administration (FHA).

MIP is utilized on HUD (Housing & Urban Development) Home Loans—otherwise known as Federal Housing Administration (FHA) loans.

It is similar in scope to the Private Mortgage Insurance discussed above—however the key differences are that the protection insures government backed loans (FHA) as opposed to conventional loans and MIP is now required to be paid over the life of the loan—for most FHA loans.

How They Work:

 

 

In most FHA programs, an Up-Front Mortgage Insurance Premium (UFMIP) is collected at loan closing; and an Annual Mortgage Insurance Premium (MIP) is collected in monthly installments.

The FHA mortgage insurance premium is based upon the date that the FHA Case Number was assigned.

If you currently were in the market for a home and your loan amount was $625,000 or less—1.35 basis points would be applicable upfront—and your annual rate would vary—based on the new guidelines.

For loans greater than 15 years and greater than 90% loan-to-value (LTV)—MIP was Cancelled at 78% LTV & 5 years under the old rules—now on new guidelines—MIP must be paid over the loan term (30 years)—which is a major change.

Even a 15 year loan with LTV of greater than 90% require that MIP must be paid over the loan term—where it was cancelled at 78% LTV—previously.

Even a 15 year loan with LTV of less than 78% require MIP of .45 basis points—over an 11 year period!

Note: FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home.

For streamline refinance without appraisals, FHA uses the original appraised value of the property to calculate the LTV. 

Most streamline refinance guidelines were not affected by the—most recent—mortgage guideline changes.

Also note that it is not uncommon for FHA Mortgage Guidelines to change.  For the most current and up to date information—you may have to contact a loan officer who has current experience with FHA loans.

 

With the current up front and annual MIP rate at 1.35%—a 200,000 home purchase with 96.5% financing (FHA 3.5% down payment)—would require an upfront fee of ($200,000*1.35%) $2,700.00—and the annual premiums would be $200,000 * .5 = $1000.00 or $83.33 monthly over a 360 month period.

NOTE: Keep in mind the actual figures above—will vary based on your credit position and individual circumstances.

History of FHA Loans:

FHA loans were created during the Great Depression to help lower-to middle-income buyers afford homes.  With these loans the minimum down payment is now 3.5 percent. The loans are provided through private lenders—but are federally insured.

If an FHA loan of $200,000 is granted to a buyer—and they only put 3.5% down—MIP would apply.

Qualifying ratios for loans that require MIP are—31% on the front end (monthly housing debt as a percentage of monthly income) and 43% on the back end (monthly housing and other debt as a percentage of monthly income). 

A percentage of the loan, called a Mortgage Insurance Premium, must be paid at closing, and a portion is usually financed by the lender—a Mortgage Insurance Premium is often referred to as (MIP) or Monthly Mortgage Insurance (MMI).

If you sell (or refinance) prior to the payoff of the MIP—you may be entitled to a refund—of a portion of the MIP—that was paid upfront.

FHA loans occupied a small percent of the mortgage market—until after the real estate and financial market downturns in 2008—which is now (2013) over 30% of the mortgage market—according to many market watchers.

The sub-prime mortgage crisis is hugely responsible for much of the growth, according to many mortgage loan professionals.

In the past many government loans were much harder to obtain—due to all of the rules, guidelines and restrictions involved—however with automated underwriting—those issues are not as prevalent as they once were!  

Due to the fact that many conventional lenders have tightened their guidelines, more people are now going through FHA if they’re eligible—and they lack a large down payment.

Many potential home owners choose to utilize a low down payment—as part of their long-term financial planning strategy—that they are pursuing—and as a means to reaching their long-term goals—they are willing to pay mortgage insurance.

 

Q: Who are loans that have MIP—appropriate for?

 A: Home buyer's who lack the required 20% down that it takes to avoid Mortgage Insurance—and those who are otherwise ready, willing and able to purchase a home.

If you can obtain conventional financing with a low down payment—that may be a better option—as FHA—now finance MIP's—over the term of a 30 year loan—and they even charge a premium on 15 year loans.

MIP may also be appropriate for those who do have the required 20% down payment—but they choose to use the lower down payment—as part of an overall strategy to improve their long-term finances—and they don't qualify for conventional financing at a better rate!

Q: How can I avoid or end the premium?

A:  You can avoid the fee by choosing conventional financing—or doing an 80/20—80/15/5—or 80/10/10 piggyback loan through conventional lenders that still offer them.

You can have the fee reduced by putting down  a higher percentage of the purchase price  (owner occupied residence) on the home that you purchase.  You can also avoid the payment of MIP by purchasing your home with a cash offer.

You can no longer end the MIP premium by getting to the equity position that is required by your lender—because the FHA now require that MIP be paid over a 30 year period—on loans of 30 years that have a low down payment.

You can also utilize owner-financing—and other creative options to possibly avoid PMI—however be sure you know your risks!

Q: How does the mortgage lender benefit from this premium?

A: By you (purchaser) paying this fee—lender's are able to make more loans available—thus increasing the number of loans that they can pool together and sell in the secondary loan market—thus providing them the opportunity to make more loans—and ultimately increase their earnings.

Q: How do consumers  benefit  from this premium?

A: Consumers who desire to purchase a home can put down a lower amount and obtain a home loan at a competitive rate.

If done as part of an overall and comprehensive financial plan—consumers can put themselves in position to attain many of their financial goals—possibly in a more efficient manner.

 

Q:  Can I deduct this premium on my tax return?

A: Yes, at the present time—tax year 2013—you can do so—however, Congress has not extended—or made permanent—this tax deduction as of October 2013.

3) VA Funding Fee

What Exactly is a VA Funding Fee?

VA Funding Fee—is a fee that lender’s require on VA home loans where the purchaser puts little—or nothing down—on the purchase of their primary residence.

It is utilized on VA (Veteran Affairs) Loans.  The Funding Fee in VA loans work a lot differently from PMI and MIP mentioned above—as the Fee is “paid up-front”—and there is no monthly payment for mortgage insurance. 

The fee is actually financed into the loan amount—or you can pay the fee in cash—at closing. 

The payment of the fee helps reduce the risk of loss—to the lender—and is a form of insurance in a similar manner as mortgage insurance—mentioned above.

 

VA Funding Fee  

Generally, all Veterans using the VA Home Loan Guaranty benefit must pay a funding fee.

 

This is great for a veteran (or their surviving spouse)—as it allows a low—or no down payment—and the loan has no monthly mortgage insurance. 

The funding fee also reduces the loan's cost to taxpayers.

The funding fee is a percentage of the loan amount which varies based on:

 

• the type of loan and your military category

• whether you are a first-time or subsequent loan user

• whether you make a down payment.

     

 

You have the option to finance the VA funding fee—or pay it in cash, but the funding fee must be paid at the closing.

 

You do not have to pay the fee if you are a:

 

• Veteran receiving VA compensation for a service-connected disability, OR

• Veteran who would be entitled to receive compensation for a service-connected disability—if you did not receive retirement—or active duty pay, OR

• Surviving spouse of a Veteran who died in service—or from a service-connected disability

 

 

 

The funding fee for second time users who do not make a down payment is slightly higher.

In addition, National Guard and Reserve Veterans pay a slightly higher funding fee percentage.

To determine your exact percentage, please review the latest funding fee chart—or scroll down several paragraphs for real world examples.

 

What Exactly is a VA Mortgage?

 

A VA Mortgage is a home mortgage loan granted by a lending institution to qualified veterans of the United States armed forces—or to their surviving spouses—and it is a loan that is guaranteed by the VA. 

 

The guarantee reduces risk to the lender—for all—or part of the purchase price—on conventional homes, mobile homes—and condominiums. 

 

Because of this federal guarantee—banks and thrift institutions can afford to provide 30-year VA mortgages on favorable terms with a relatively low down payment—even during periods of tight money and an uncertain economy.

 

Interest rates on VA mortgages, formerly fixed by the Department of Housing & Urban Development—together with those of Federal Housing Administration (FHA) mortgages—are now set by VA.

 

VA mortgages comprise an important part of the mortgage pools packaged and sold as securities by such quasi-governmental organizations as the Federal Home Mortgage Corporation (Freddie Mac) and the Government National Mortgage association (Ginnie Mae).

VA mortgages are commonly sold—and due to the reduced risk (government guarantee)—there are usually a constant stream of investors.

 

 

          Other Loan Concerns:

Be aware that the lender charges interest, in addition to closing fees and charges—and guidelines can change.

 

Here are some general rules:

 

 

• The lender, not VA, sets the interest rate, discount points, and closing costs. These rates may vary from lender to lender.

 

• Closing costs such as the VA appraisal, credit report, state and local taxes, and recording fees may be paid by the purchaser, the seller, or shared.

 

• The seller can pay for some closing costs. A seller's "concessions" cannot exceed 4% of the loan.  Only some types of costs fall under this 4% rule.

• Examples are: payment of pre-paid closing costs, VA funding fee, payoff of credit balances or judgments for the Veteran, and funds for temporary "buy downs." Payment of discount points ares not subject to the 4% limit.

 

•  You are not allowed to pay for the termite report, unless the loan is a refinance. That fee is usually paid by the seller.

 

 

•  No commissions, brokerage fees, or "buyer broker" fees may be charged to the Veteran buyer.

 

CAUTION:

Adding the VA Funding Fee and other loans costs to your loan may result in a situation in which you owe more than the fair market value of your house, and may reduce the benefit of refinancing.

Since, in some cases—your payment will not be lowered as much as you might expect.  In addition,  you could possibly have difficulty selling your home (depends on market conditions) for the amount needed to pay off your loan balance.

 

The VA Funding Fee is a one-time fee charged on a VA loan in order to limit the overall cost of the VA loan.

The VA loan requires no down payment—and has no monthly mortgage insurance.

 

The VA Funding Fee is non-refundable, however the fee does not have to be paid prior to the closing in a lump sum by "you"—unless you decide to do so.

The VA Funding Fee can be paid in a lump sum at closing by the lender—and financed into the loan at closing—which is what most VA borrowers end up doing—as a practical matter.

 

The VA Funding Fee is also an allowable seller concession, however it must be factored into the 4% maximum that is allowed for seller concessions.

 

Q: What is a DD 214 and why is it required for VA Loans?

A: It is a certificate that is required from qualified military personnel—by the lender—for those who apply for a VA home loan.

 

 

The VA Loan Funding Fee ranges from 2.15% to 3.3% of the loan amount on home purchases.

 

The VA Loan Funding Fee ranges from .5% to 3.3% of the loan amount on home refinances.

 

VA Loan Funding Fees

 

For Home Purchases:

If you were to purchase a $200,000 home with no down payment as a regular military veteran—and you were a 1st time user—your loan amount would be as follows:

$200,000 * 2.15% = $4,300

You would then have the option of paying the $4,300 out of pocket at closing—or financing it into the loan—therefore your new loan amount would be $204,300.  You could also negotiate to have the seller pay the funding fee—as part of the 4% seller concession.

If you were a subsequent user:

$200,000 * 3.30% = $6,600

You would then have the option of paying the $6,600 out of pocket at closing—or financing it into the loan—therefore your new loan amount would be $206,600.  Again, you could also negotiate to have the seller pay the funding fee—as part of the 4% seller concession.

Note: The same concept would apply if you were Reserve/National Guard or you were to refinance!  Just plug in the appropriate numbers to calculate your funding fee amount—or your new loan amount.

Type of Veteran Down Payment (DP means Down Payment)

1st Time Use 

Subsequent Use

Regular Military:

No DP—2.15% 3.30%
5% to 10% DP—1.50% 1.50%
10% or More DP—1.25% 1.25%

Reserves / National Guard:

No DP—2.40% 3.30%
5% to 10% DP—1.75% 1.75%
10% or More DP—1.50% 1.50%

For Cash Out Refinances:

Type of Veteran

1st Time Use

Subsequent Use

Regular Military:

2.15% 3.30%

Reserves / National Guard:

2.40% 3.30%

For those with a VA Loan who are refinancing simply to lower their interest rate, the VA Funding Fee is only .5%.

As the table points out, there is a slight difference in the VA Funding Fee depending on whether you were active duty or spent time in the Reserves/National Guard.

There are scenarios where a borrower is exempt from a VA Funding Fee.

The VA outlines the following as being exempt regardless of a first or subsequent use of a VA Loan:

•       Veterans receiving VA compensation for service-connected disabilities.

•        Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.

•        Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own entitlement on the loan).

 

  

The VA Home Loan program involves a veteran’s benefit.

VA policy has evolved around the objective of helping the veteran to use his or her home loan benefit. Therefore, VA regulations limit the fees that the veteran can pay to obtain a loan.

 

Lenders must strictly adhere to the limitations on borrower-paid fees and charges when making VA loans.

 

•  In order to defray the cost of administering the VA Home Loan program, each veteran must pay a funding fee to VA at loan closing.

 

•  Congress may periodically change the funding fee rates to reflect changes in the cost of administering the program, or to assist a certain class of veterans.

 

• The VA funding fee is required by law

 

Quick Rundown on VA Funding Fees

 

The fee, currently 2.15% on no down payment loans for a first-time use, is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers.

The funding fee for second time users who do not make a down payment is 3.3%. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment.

 

 

For purchase and construction loans:

Members of the regular military fall into the category of first time user or a subsequent user.

First time user:

For first time users, no down payment requires a 2.15% fee,

Down payment of at least 5 percent but less than 10 percent requires a 1.5% fee

Down payment of 10% or more requires a 1.25% fee.

 

For subsequent users:

 

No down payment requires a 3.3% fee,

Down payment of at least 5 percent but less than 10 percent requires a 1.5% fee

Down payment of 10% or more requires a 1.25% fee.

 

 

For the category of Reserves / National Guard:

First time users:

First time users with no down payment requires a 2.4% fee

Down payment of at least 5 percent but less than 10 percent requires a 1.75% fee

Down payment of 10% or more requires a 1.5% fee.

 

For subsequent users for the category of Reserves / National Guard:

 

Down payment requires a 3.3% fee

Down payment of at least 5 percent but less than 10 percent requires a 1.75% fee

Down payment of 10% or more requires a 1.5% fee.

 

Cash-out refinancing loans for regular military:

 

Require a 2.15% fee for first time users

A 3.3% fee for subsequent users

 

For Reserves / National Guard:

 

The requirement is a 2.4% fee for first time users

A 3.3% fee for subsequent users

If there are down payments involved, refer to the information above.

 

On interest rate reduction loans:

 

The VA funding fee is .50%

It is 1.0% on Manufactured Home Loans.

Other Key Points You Must Know About Mortgage Insurance

Ways That You Can Avoid Mortgage Insurance:

1)  Piggy-back Loans

The real estate market meltdown crisis had a major influence on the use of “piggyback loans,” where a buyer could take out a second mortgage to avoid paying mortgage insurance (80% 1st mortgage and 20% 2nd mortgage—or doing an —80/15/5—or 80/10/10 piggyback mentioned above—through conventional lenders that still offer them).

Although these once-common loans are still around, many lenders have moved away from them—and they are now more difficult to find.

The second mortgages that were taken out were the first to default during the housing crisis—and it became a risk for banks to offer them—as many took a real bath—with those loans.

Also, due to a 2007 tax provision making mortgage insurance premiums tax deductable for borrowers with  income within certain parameters—it became cheaper for many borrowers to keep the mortgage insurance—rather than try to get a Piggyback Loan (deduction on their taxes made the payment less painful).

Mortgage insurance premiums may be tax deductible. To qualify, the insurance policy must be for home acquisition debt on a first or second home. Home acquisition debt are loans whose proceeds are used to buy, build, or substantially improve your residence.

 

Thus mortgage insurance policies on cash-out refinances and home equity loans won't qualify for the deduction.

 

Mortgage insurance premiums paid during the year are reported on Form 1098 which is sent out by the lender. Prepaid insurance premiums can be allocated over the term of the loan or 84 months (7 years)—whichever period is shorter— under a ruling from the IRS (Notice 2008-15).

The premiums you pay for Mortgage Insurance—property taxes, mortgage interest and loan origination points—are an itemized tax deduction on your tax return (1040 long-form) and are reported on Schedule A.  

 

Keep in mind that the Mortgage Insurance Deduction—is a temporary tax break—and it is effective for mortgage insurance policies issued on—or after January 1, 2007—and the deduction is scheduled to expire on December 31, 2013—unless extended—or made permanent by Congress.

Also keep in mind that under new FHA guidelines
—30 year loans with a low down payment require that mortgage insurance premiums be paid over the term of the loan—15 or 30 years.

2) Meet the Equity Requirement of Your Mortgage Lender

It is important that you keep track of your payments on the principal of the mortgage. When you reach 80% equity, notify the lender that it is time to discontinue the PMI premiums.

To make it easier, lenders are now required to tell the buyer at closing how many years and months it will take for them to pay 20% of the principal to cancel PMI.

However, U.S. law does allow lenders to continue requiring PMI all the way down to 50% equity for so-called high-risk borrowers.

Traditionally, loans considered high risk include reduced documentation loans, in which customers provide less proof of income—and other information during the approval process.

Loans for people with poor credit histories and higher debt-to-income ratios also fall into this category. 

The way that you can end PMI will be included in the mortgage loan documents that you would receive at closing—so be sure to safeguard your closing documents.

Again, you must  keep in mind that under the new FHA guidelines—30 year loans with a low down payment require that mortgage insurance premiums be paid over the term of the loan—180 months (15 years) or 360 months (30 years).

3) Increase Your Down Payment to 20%—or more—or purchase with cash

If 20% or more is put down on the property that you purchase with conventional financing—there is no need to substitute for the down payment with insurance—as most lenders are willing to accept the risk—if they are only lending 80%—or less—of the purchase price—of an owner—occupied home.

As always—cash is king!  If you purchase your home with an all cash offer—there will be no mortgage insurance required—and you should have a smooth—stress free closing.

Final Thoughts on Private Mortgage Insurance, Mortgage Insurance Premiums & VA Funding Fees

For those who are unable—or desire to use a low down payment option to purchase their home— paying mortgage insurance of the types listed above will be required. 

You must understand that paying mortgage insurance on a monthly basis—is often a necessary cost—if you want to purchase a home without a significant down payment. 

Be sure that you have a system that allows you to analyze your credit and finances in a comprehensive manner—before—or while you are considering mortgage insurance as a part of your plan to improve your—and your family's living conditions!

In addition, be sure that you understand the terms of your current mortgage contract—and be sure to calculate your loan to value ratio on a consistent basis—to avoid paying mortgage insurance longer than you absolutely have to.

Moreover, knowing when and how to remove PMI will lower your monthly mortgage bill.

Follow the tips above and the next time you apply for a mortgage, make sure you understand the PMI rules and ask for clarification before signing your final loan documents!

 

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