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Tag: mortgage insurance

The Benefits of the FHA Loan – and Why It’s a Popular Choice Right Now

FHA (Federal Housing Administration) loans can be a great choice for many looking to purchase a primary residence, and not just first-time homebuyers. These loans offer several advantages that make home ownership more accessible.

One of the key benefits of the FHA loan is the lower down payment requirement, making it easier for individuals with limited savings to enter the housing market.

Lower Down Payment

One of the standout features of FHA loans is the reduced down payment requirement. While conventional mortgages often demand a larger down payment, sometimes around 20%, FHA loans typically require only 3.5% down.

This lower upfront cost opens doors for prospective buyers who may struggle to come up with a significant down payment, providing a more attainable path to home ownership.

Gifts for Down Payments

Receiving FHA gift funds can make it easier to qualify for an FHA loan…but borrowers must follow a particular process for eligibility. First, the money can’t be a loan – it has to be a gift with no scheduled repayment.  Secondly, it must be a family member, a charitable organization, an employer, or a governmental agency assisting families or first time buyers.

FHA guidelines for gift funds include:

  • Gift funds must be from an acceptable source such as savings accounts, stocks, or savings bonds
  • Gift funds must be verified entering into a borrower’s bank account and leaving the donor’s bank account
  • Documentation showing proof funds are not a collateralized loan such as an FHA gift letter

Borrowers may have to provide additional supporting documentation, as well.

Mortgage Insurance

Mortgage insurance premium (MIP) is a type of mortgage insurance that is required of homeowners who take out loans backed by the FHA.  For most borrowers that bring in a 3.5% down payment, the fee is .55 of the loan amount.

So, if you have a $300,000 FHA loan, your monthly mortgage insurance would cost $137.50 per month.  In many cases, this mortgage insurance is MUCH less expensive than that of conventional loans and private mortgage insurance (PMI).

You can learn more about mortgage insurance here…

Accessible Credit Requirements

FHA loans are also known for being more forgiving when it comes to credit requirements.

Conventional mortgages may be challenging for individuals with less-than-perfect credit scores, but FHA loans are designed to accommodate a broader range of credit profiles.  Most investors will lend with a credit score of 580 or better.

This enables people with lower credit scores to qualify for a home loan, giving greater opportunities for those who may have faced obstacles in the conventional mortgage market.

Flexible Qualification Criteria

FHA loans offer flexibility in qualifying criteria, considering factors beyond traditional income and credit scores.

Lenders can take into account compensating factors, such as a history of timely rent payments or utility bills, making it easier for individuals with unique financial situations to secure a mortgage. This flexibility allows the consideration for a more diverse set of borrowers in the homebuying process.

Government Backing and Stability

FHA loans are backed by the federal government, providing an additional layer of security for both lenders and borrowers.

This backing makes lenders more willing to approve loans for individuals who may not meet the stringent criteria of conventional mortgages. The government support also helps stabilize the housing market by providing a reliable option for financing, even during economic downturns.

In Conclusion

FHA loans provide a range of benefits that contribute to making homeownership more accessible for a diverse group of borrowers. From lower down payment requirements, to the use of gift funds, to flexible credit criteria and government backing, these loans play a crucial role in expanding opportunities for prospective homebuyers.

Do reach out to me for more regarding these FHA programs, as it would be my pleasure to help in any way possible!

Removing Mortgage Insurance: A Guide to Financial Freedom

Mortgage insurance is a common expense that many homeowners face, especially when they buy a house with a down payment of less than 20% of the purchase price.

Understanding how to remove mortgage insurance can really help in lowering your overall mortgage payment.

Let’s take a look at how to remove this financial hurdle and ultimately save money in the long run.

Understand the Types of Mortgage Insurance

Before diving into the removal process, it’s crucial to comprehend the two main types of mortgage insurance: Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for FHA loans.

Both serve the same purpose: to protect the lender in case the borrower defaults on the loan. PMI can be removed under certain circumstances, while MIP remains for the life of the loan for FHA borrowers.

Achieve 20% Equity

The key to removing PMI on conventional loans is reaching 20% equity in your home. Equity is the percentage of your home’s value that you own outright.

You can accomplish this in several ways, such as making extra payments towards your principal balance, making home improvements that increase its value, or waiting for your home to appreciate naturally over time.

Tracking your loan balance and property value will help you gauge when you’ve reached the 20% threshold.

Request PMI Cancellation

Once you believe you’ve achieved 20% equity, contact your lender to request the removal of PMI. They may require an appraisal to verify your home’s current value.

If the appraisal confirms your equity position, your lender should terminate the PMI premiums.

It’s essential to stay diligent and follow up to ensure this happens, as some lenders may not automatically remove PMI.

Refinance Your Loan

Another way to remove mortgage insurance is by refinancing your loan…and this is how you remove MIP from FHA loans.

If market interest rates are lower than when you initially purchased your home, refinancing could not only save you money on your monthly payments but also allow you to secure a loan without mortgage insurance if your equity position has improved. 

This is the option most used by homeowners.

In Conclusion

Understanding how to remove mortgage insurance is a crucial financial piece that can help you save money in the long run when you become a homeowner.

Achieving 20% equity and requesting PMI cancellation or refinancing your loan are two effective strategies to eliminate this extra expense.

Please do reach out to me today to discuss your current situation, as I’d be more than happy to discuss your options!

Big and Welcomed Changes Here For New FHA Loans

FHA mortgages have long provided first-time homebuyers and those with less-than-stellar credit an affordable way to achieve home ownership. But one of the main drawbacks of these mortgages has been that their mortgage insurance costs are relatively high.

Reduced mortgage insurance rates go into effect today for many FHA borrowers. The typical borrower will pay 0.55% of their loan amount annually in mortgage insurance costs (as opposed to the .85% rate previously) – a decrease of 30%!

The White House announced Wednesday that the US Department of Housing and Urban Development (HUD) will lower annual mortgage insurance premiums (MIP) on FHA mortgages. These loans are insured by HUD’s Federal Housing Administration.

Mortgage insurance is required on all FHA loans (regardless of down payment size) to allow for more flexible qualification requirements, like a lower credit score.

FHA mortgages are used for primary residences, not 2nd homes or investment properties.

Overview of the Changes

Mortgage insurance is paid as a percentage of the borrower’s loan amount, and how much an individual pays depends on how much they borrowed, their down payment, and the loan term. Currently, most borrowers pay an annual mortgage insurance rate of 0.85%.

To show the monetary value of this change, a borrower in a $265,000 home would save about $800 per year. A borrower with a $467,700 home – the national median home price in December 2022 – would save more than $1,400 annually, according to the HUD press release.

By reducing the costs for this type of loan, more people may be able to afford owning a home.

This is especially true for low-income and first-time home buyers, who tend to benefit from FHA loans the most.

This change is a welcome reprieve for Americans who, in the last year, have experienced higher home prices, housing costs and mortgage rates.

The Bottom Line

By reducing the costs associated with getting an FHA mortgage, HUD aims to make home ownership more affordable. 

Nearly 84% of FHA mortgage borrowers are first-time homebuyers, and 43% of FHA borrowers are low income, according to HUD.

Also, FHA mortgage rates are generally lower than conventional rates. So, it will be in buyers’ best interest to have a mortgage pro who can work with them to figure out which loan program would be the best for their current situation.  It wouldn’t surprise me to see conventional loan originations drop because of these FHA changes.

Where Can I Get More Information?

Contact me directly to discuss your current situation and how you might be able to take advantage of today’s FHA changes.  It would be my pleasure to help you!

Mortgage Insurance – Mistakes to Avoid and How to Pay Less

Most loans with less than 20 percent down (for purchases) or home equity (for refinances) require some form of mortgage insurance. This can be pricey for some borrowers, so it’s important to have a strategy to deal with this type of insurance.

Everyone wants to pay less for mortgage insurance and with a little preparation and some shopping around that may be possible.

But before we look at lower costs, let’s first explain what mortgage insurance (MI or PMI for ‘private mortgage insurance’) really is.

I highly recommend that you read the entirety of Peter Miller’s post from The Mortgage Reports, although I’ve put together a few key pieces from his article below…and my article on Mortgage Insurance here…

For conventional (non-government) loans, it may be also be called PMI, or private mortgage insurance. FHA programs require mortgage insurance premiums (MIP) regardless of the size of down payment.

VA home loans call their insurance premium a funding fee. Some lenders may not require a separate insurance policy, but charge a higher interest rate to cover their risk.

Why 20 percent down?

Mortgage lenders really, really want you to buy a home with at least 20 percent down. That’s because it substantially reduces their losses if you don’t repay your loan and they have to foreclose.

However, most homebuyers, especially first-timers, don’t have 20 percent to purchase a property. The National Association of Realtors lists these figures for median down payments in 2018:

  • All buyers: 13 percent
  • First-time buyers: 7 percent
  • Repeat buyers: 16 percent

If you don’t have 20 percent down, most lenders force you to purchase mortgage insurance. The policy covers their losses if you default and they don’t fully recover their costs in a foreclosure sale.

How much does mortgage insurance cost?

What MI costs are you likely to face? For conventional mortgages, MI costs depend on your credit rating, down payment size, and type of loan you choose. For government loans, your credit score does not affect mortgage insurance premiums.

Here’s the advice that Peter Miller gives on how to pay less….

How to pay less for mortgage insurance

Mortgage insurance can be a big cost. For example, if you buy a home for $250,000 with 3.5 percent down, and get FHA financing, the up-front MIP will be $4,222. You’ll also pay annual MIP of $171 per month. After five years, you will have spent $14,482 ($171 x 60 plus $4,222).

Here are several strategies to reduce or eliminate mortgage insurance costs.

Go piggyback

Instead of getting one mortgage, get two. Try a first mortgage equal to 80 percent of the purchase price and a second mortgage for 5, 10 or 15 percent of the balance. You can then buy with no mortgage insurance. Here’s how that might work, assuming that you have a 700 FICO score, 5 percent down, and buy a traditional single-family home for $250,000:

  • First mortgage principal and interest, assuming a 4.5 percent interest rate: $1,013.
  • Second mortgage principal and interest, assuming a 7 percent interest rate: $249
  • Total payment: $1,263

A comparable 95 percent loan with 25 percent coverage looks like this:

  • First mortgage principal and interest at 4.5 percent: $1,203
  • Mortgage insurance: $108
  • Total payment: $1,311

In this case, the difference is about $50 a month.

Refinance

If the value of your property has grown, you may be able to refinance to a loan without MI, instead of without waiting until your balance is less than 80 percent. When refinancing, you want to try for a double MI whammy — a new loan with both a lower rate and no MI requirement. Speak with a loan officer for details; the monthly savings might be significant.

Look for refundable premiums

If you expect to be a short-term owner, look for mortgage insurance programs with refundable premiums. With the FHA, for example, you can get a partial refund if you pay off the loan within three years. And private mortgage insurers also offer refundable premiums. However, their upfront costs may be higher.

Reduce your risk profile

With conventional financing, you can significantly reduce what you pay for mortgage insurance by being a less-risky borrower.

  • Improve your credit score. Even a one-point increase can save you money if it puts you into a better tier
  • Make a larger down payment. Going from 3 percent to 5 percent can save you money, depending on the program
  • Choose a fixed loan over an ARM
  • Choose a loan with a term of 20 years or fewer

Cancellation

Conventional loan guidelines allow borrowers to request cancellation of their MI once their loan falls to 80 percent of the value of the home when you took out your mortgage. You must normally be in good standing with your lender to drop MI this way.

With FHA and USDA mortgage insurance, coverage continues for the life of the loan. For VA-backed financing, there is no monthly charge.

Automatic termination

Alternatively, mortgage insurance for conforming loans “must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be canceled on that date, you need to be current on your payments on the anticipated termination date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.”

In Conclusion

Do reach out to me to discuss your down payment and mortgage insurance options, as it would be my pleasure to help you!

The Top 5 Down Payment and Mortgage Insurance Myths

For first-time home buyers, it can be more than overwhelming to hear all the stories from friends and colleagues about getting their first home loan.

Many times they are led to some false conclusions.

If they don’t know the real facts about the loan qualification process, it can keep them from taking the necessary steps toward owning the home they’ve been dreaming about.

Let me clear up some facts and make sure the correct information is out there.

The Top 5 Down Payment and Mortgage Insurance Myths

Number 1: Borrowers need a 20% down payment

According to the National Association of Realtors, the majority of first-time home buyers believe they need at least a 10% to 20% down payment. However, that’s simply not true with all of today’s different loan types and programs. Across the US, today’s average down payment is generally in the range of 5-10%. Even so, there are loan programs that allow as low as 3% and even a few no-down loan options.

Number 2: Mortgage Insurance (PMI or MIP) is required on all home loans with less than 20% down

Mortgage insurance is generally required by the lender when a borrower purchases a home using conventional financing with less than a 20% down payment. But there are dollar house questionmarkloan programs available that don’t require PMI. VA Loans do not require PMI, for instance. There are other loan programs with possible reduced mortgage insurance, so be sure to check in your mortgage lender to find out what might fit your particular situation.

Number 3: Mortgage Insurance is Permanent

Mortgage insurance is in place to protect the lender when there is less than 20% equity built up. Once more than 20% equity is in place, this insurance can be removed. Believe it or not, PMI will automatically be terminated when the principal balance reaches 78% of the original value. You can also request cancellation sooner in writing if your home value has increased enough (contact your lender for exact requirements and instructions).

For those with FHA loans, borrowers can refinance into a conventional loan to eliminate the insurance when your loan-to-value reaches 80%.

Number 4: Mortgage Insurance Protects the Borrower

Interestingly, many borrowers make the mistake of thinking that PMI is insurance that either protects the home or protects them if they end up in a foreclosure situation.House_key_digital

Actually, mortgage insurance is in place to protect the lender from default on the loan, which enables lenders to help more borrowers get loans. It does not provide protection for the borrower if they go into foreclosure.

Number 5: No Gifts Can Be Used for a Down Payment

It’s common for today’s U.S. buyers to receive cash down payment gifts. First-time home buyers are most likely to receive a cash gift among all buyer types, but repeat- and move-up buyers receive them, too.

The down payment gift rules are (1) the gift must be documented with a formal “gift letter”; (2) a paper trail must be shown for the gifted monies as they move from the giver’s account to the home buyer’s account; and (3) the gift may not be a loan-in-disguise. You can find out more about the specific of gifts from Dan Green at The Mortgage Reports here.

Now that you know more of the facts about down payments and mortgage insurance, let me know how I can help you begin your home ownership journey!

Tom Title Bar

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