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 
loan 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.
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!
