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Kentucky Mortgage and PMI Breaking down PMI
PMI can be a nominal price to pay for being able to secure a home loan with today's mortgage rates.
What is PMI?
For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.
It is not the same thing as homeowner's insurance. It's a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment.
While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans
**Does not include property tax and homeowner’s insurance payments
PMI isn't forever
Once you've built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.
Talk with your lender about what down payment makes the most sense for your financial situation. Remember, you have options!
What is Mortgage Insurance?
If you can’t pay your mortgage, mortgage insurance protects your lender from financial loss. It doesn’t provide any coverage for your home; it only protects your mortgage lender. If you put less than 20% down on a home purchase, the lender considers your mortgage to have a higher risk. Therefore, mortgage insurance protects their investment if you stop making loan payments.
When Are You Required to Have Mortgage Insurance?
Different mortgage types and lenders have varying mortgage insurance requirements. While some may require mortgage insurance as a monthly payment, others may require an upfront fee or a combination of both.
Conventional Loan Mortgage Insurance Requirements
If you have a conventional loan through a private lender and put less than 20% down, a lender can require you to purchase private mortgage insurance (PMI). While some lenders require the borrower to pay for the mortgage insurance, other lenders offer lender-paid mortgage insurance. In other words, instead of directly paying for the mortgage insurance, the lender increases the interest rate to account for the additional risk of the loan.
There are several ways you can pay for your PMI if it’s a requirement:
Pay the entire amount in full
Make monthly payments
Or combine the two options
Most borrowers choose to make monthly payments.
You’ll continue paying for PMI until your mortgage balance reaches 80% or less of the home’s value and you have made timely payments. At this point, you should request the removal of PMI. Some lenders will automatically remove PMI when your loan balance reaches 78% of the original value of the home.
It’s important to point out that it’s your responsibility to keep track of the loan balance and payments. So when you reach a sufficient amount of equity, it’s up to you to request a cancellation of PMI. If you don’t, you could end up paying more premiums than you need to.
Some conventional lenders don’t require PMI, even if you put less than 20% down. So before applying for a mortgage, ask the lender about the PMI requirements.
FHA Mortgage Insurance Requirements
Suppose you choose a Federal Housing Administration (FHA) loan. In that case, you’re required to have mortgage insurance and pay it as an upfront mortgage insurance premium (UPMIP) and an annual mortgage insurance (MIP) regardless of your down payment amount.
Similarly, if you choose a U.S. Department of Agriculture (USDA) loan, you pay mortgage insurance in the form of a guaranteed fee and an annual upfront fee.
With an FHA loan, there are some circumstances where you can’t cancel your mortgage insurance when you reach 20% equity. MIP will remain in your loan indefinitely if you put less than 10% down. On the other hand, MIP can be removed after 11 years if your down payment is over 10%.
How to Get Mortgage Insurance
Your lender will select your mortgage insurance from a private company if you have a conventional loan. The payment is included in the monthly payment to your lender. Other lenders increase your interest rate to account for the mortgage insurance payment.
Unlike conventional loans, FHA loans require an upfront mortgage insurance payment as part of your closing costs. But like conventional loans, the other portion of your mortgage insurance is added to your monthly payment. Both payments are paid to the FHA.
Mortgage Insurance Cost
Depending on factors like your loan type, credit history and down payment, mortgage insurance costs can vary. But you can expect to pay between $30 and $70 per month for every $100,000 you borrowed, according to Freddie Mac.
With a USDA loan, you can expect your annual mortgage insurance rate to be 0.35% with a 1% upfront payment. FHA loan annual mortgage insurance rates currently vary between 0.8% and 1.05%, with a 1.75% upfront fee.
Suppose you buy a $300,000 home with a 3.5% down payment, for example. This means you must borrow $289,500. If you have a 30-year term with a 2.71% interest rate, you’ll pay an extra $114.54 (0.85%) in MIP with a UFMIP of $5,066.25.
How to Avoid Mortgage Insurance
If possible, you can avoid mortgage insurance since it covers your lender, not you. To avoid paying this additional expense, here are a few options.
Put down 20% or more. If you can put more than 20% down on a conventional loan, you probably avoid paying for PMI.
Take out a piggyback loan. With this type of loan, you can put 10% down and get another loan to cover the other 10% of the down payment.
Apply for a VA loan. If you qualify, you could buy a home with a VA loan, which doesn’t come with mortgage insurance requirements.
Compare lenders. Before you decide on a home, compare loan options and offers from various lenders; some may not require mortgage insurance. Review all costs involved to find the most suitable option for your needs.
If you do end up purchasing a home with mortgage insurance, make sure to keep track of the equity built in your home. This way, once your loan is less than 80% of the home’s value, you can either refinance or request a cancellation of your mortgage insurance if your lender allows.
I can answer your questions and usually get you pre-approved the same day.
Call or Text me at 502-905-3708 with your mortgage questions.
Joel Lobb (NMLS#57916)
Senior Loan Officer
Frequently Asked Questions about MI
- What is private mortgage insurance?
- Private mortgage insurance provides a significant layer of protection to lenders, helping them reduce — and sometimes eliminate — foreclosure losses on low-down-payment loans. As a result, private MI helps families buy homes with minimal cash out of pocket, making the American dream of homeownership attainable sooner than otherwise possible.
- What's the difference between private MI and FHA insurance?
- Private MI is the private sector alternative to Federal Housing Administration (FHA) mortgage insurance, which is a government program backed by taxpayers. Private MI typically may be cancelled sooner than FHA.
- Are private mortgage insurance and mortgage life insurance the same thing?
- No. Mortgage life insurance pays off a mortgage if the homeowner dies or becomes disabled.
- Are Private MI and Homeowners Insurance the same thing?
- No. Homeowners' insurance protects homeowners from loss due to theft, fire or other disaster. Private MI protects the lender and investor from loss, not the borrower.
- Why is private MI needed?
- Experience shows that homeowners with less than 20% invested in the cost of a home are significantly more likely to default, making low-down-payment mortgages riskier for lenders and investors. To offset that risk, lenders and investors typically require mortgage insurance for loans with down payments of less than 20%.
- How do borrowers benefit from private MI?
- Private MI makes it possible for families to buy homes with a low down payment, helping them become homeowners sooner than otherwise possible.
- For first-time buyers, private MI helps clear the biggest hurdle to homeownership: coming up with a 20% down payment.
- For trade-up buyers, private MI allows them to consider a wider range of homes and leverage their investment in their homes.
- Both first-time and move-up buyers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies.
- Are MI premiums tax-deductible?
- Borrower-paid MI premiums are tax-deductible through the year 2011.
- Households with adjusted gross incomes of $100,000 or less will be able to deduct 100% of their MI premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, phasing out after $109,000.
- Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their MI premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500.
- The deduction is not restricted to first-time homebuyers.
- Who orders the MI?
- Generally, MI is ordered by the lender while the loan is being underwritten. The loan originator consults with the home buyer to determine which loan product best meets their needs, and then determines the MI requirements.
- How much does private MI cost?
- Premium prices vary. They are based on the size of the down payment, the borrowers' credit score, type of mortgage and amount of insurance coverage. Typically, premiums are included in the monthly mortgage payment.
- Who determines the amount of MI coverage needed for the loan?
- The investor typically determines the amount of MI coverage required for each specific loan product. Since Fannie Mae and Freddie Mac are the most prominent investors in the marketplace today, they set the standard minimum coverage requirements for the industry. We recommend lenders consult with their investors to determine the appropriate amount of coverage to order.
- Can private MI be cancelled?
- Most private MI programs allow for cancellation. Mortgage lenders/investors will typically permit the cancellation of private MI when the homeowner builds up enough equity in the home.
- Investors establish criteria for private MI cancellation, and most will cancel private MI upon request for borrowers who have a good payment history, more than 20%-25% equity, and have had the mortgage for at least two to three years.
- Lender-paid MI may not be cancelled by the borrower since the lender pays the premium.
- Under federal law, private MI on most loans made on or after July 29, 1999, will end automatically on the date the mortgage is scheduled to reach 78% of the original value of the house. See our Homeowners Protection Act brochure (.pdf) for more details.
- Are MI premiums refundable?
- Although refundable premiums are available, generally nonrefundable premium plans are selected for monthly payment policies. Mortgage insurance premiums paid in a single sum at closing or annually may be partially refundable upon cancellation, but nonrefundable premiums are often selected in order to reduce closing costs for borrowers. For all premium plans, a portion of the premium may be refundable if the policy is cancelled under the Homeowners Protection Act.
I have lived in my home for 5 years and am in the process of selling it. I had to buy PMI insurance because I did not have 20% down. Am I entitled to any type of refund once I sell the house?
Entitlement to a refund and the amount would depend on the mortgage insurance plan type and the refundable or non-refundable/limited option chosen at origination. Your best bet is to ask your lender directly, as there are many different mortgage insurance plans and combinations.
I think banks are being very greedy in demanding a secured loan plus PMI and still wanting a perfect credit rating for 7 years. My husband and I are trying to buy a home. We have a good credit rating, but not perfect credit for 7 whole years. If you guarantee the loan, what is their problem in granting it?
Mortgage insurance does not guarantee the loan, it only insures a designated portion (commonly only 12-30%) of the loan against default. The combinations of loan characteristics (credit, collateral, MI, etc.) are established as requirements by investors. Loans usually end up in mortgage backed securities. The mortgage securities may be purchased by investors, for example to go into Individual Retirement Accounts (IRA's), 401K plans, etc. The investment funds for IRAs, 401Ks, etc., have risk and return requirements which ultimately dictate the loan characteristics.
If mortgage insurance is canceled, are any pre-paid premium amounts refunded (particularly if they were originally paid by adding them to the loan amount)?
If all the mortgage insurance was financed at the time of origination and is canceled prior to it's maturity you may be entitled to a refund if the refundable option was chosen at time of origination. However, if the no refund/limited option was chosen no refund is due.
If a borrower currently has an FHA loan w/MI, after the LTV has reached 80% or less can the MI be canceled?
It is best to refer back to your lender for specific information on FHA loans.
Effective April 18, 2011 The charts below illustrate the 25 basis points (bps) increase in the Annual Mortgage Insurance Premiums. There are no changes to the Upfront Mortgage Insurance Premium (UFMIP). It is anticipated that this increase will have minimal impact on borrowers but will significantly strengthen the capital position of the MMIF.
The increase in the Annual Mortgage Insurance Premiums for forward mortgage amortization terms is effective for case numbers assigned on or after April 18, 2011.
Upfront premiums will not change on April 18, 2011. FHA will continue to charge an upfront premium in an amount equal to the following percentages of the mortgage:
Purchase Money Mortgages and Full-Credit Qualifying Refinances = 1.00 percent
Streamline Refinances (all types) = 1.00 percent
Home Equity Conversion Mortgages = 2.00 percent
Annual premiums will increase by 0.25% effective April 18, 2011.
For FHA traditional purchase and refinance products, the annual premium, shown in basis points below, is to be remitted on a monthly basis, and will be charged based on the initial loan-to-value ratio and length of the mortgage according to the following schedule (effective with FHA case numbers assigned on or after 4/18/2011):
LTV Ratio Annual Premium for over 15 Years and up to 30 Years LTV Ratio Annual Premium for Loans 15 Years and Under
95.00% and Under 1.10% 78% and under 0.00%
95.01% and Over 1.15% 90.00% to 78.01% 0.25%
90.01% and Over 0.50%
How long will I have monthly FHA mortgage insurance? Years will be determined when the loan balance equals 78% of the initial sale price or appraised value, which ever is lower, provided the mortgagor has paid the annual mortgage insurance premium for at least 5 years.
Can you give an example of how the mortgage insurance escrow's get applied to the payment?
Your lender collects moneys on escrow and remits to PMI when the premium is due. Typically, on an annual premium plan, the lender collects 14 months premium at closing. Twelve months of the premium is paid to PMI as the initial premium. The remaining two months is used to start the escrow account. The lender then collects 1/12 of the renewal every month thereafter. It is hard to give a general rule on a monthly premium plan. The plan was developed in 1994 and lenders have developed unique escrow procedures.
Premise: Mortgage insurance covers the lender for the difference between the loan amount and 80% value of the property. So for a borrower who puts 10% down, in effect mortgage insurance covers the 10% difference. What are approximate rates in premium say per $1000 dollars? Does credit history have a bearing on the premium? Can the borrower negotiate the premium?
PMI actually covers the lender for a percentage they designate. The percent of coverage is usually driven by the investor's (often, Fannie Mae or Freddie Mac) requirements. Therefore, the approximate premium per $1000 varies based on the required coverage. The premium is fixed based on plan type (loan to value, loan type, loan term, etc.) and not related to individual borrower characteristics. Therefore, the premium is not negotiable.
Are mortgage lenders supposed to provide borrowers with information on the conditions when they can cancel mortgage insurance? Are these conditions supposed to be in the loan documentation? If the borrower pays mortgage insurance monthly, and his equity goes up, should his premiums go down? Is the mortgage lender supposed to notify the borrower when he reaches 20% equity? Which states have laws on this subject? Can the borrower choose the mortgage insurance company or does the lender do that?
Because of the wide variation in lender, investor and state requirements, it is necessary to consult your lender on these questions. Keep in mind when considering mortgage insurance issues that the lender is the insured, not the borrower.
Would mortgage insurance be of use to lenders to help approve loans for higher risk (i.e. self employed) individuals?
PMI does insure loans made by lenders to self employed borrowers. However, it is unlikely that coverage would have any effect on the lender's ability to offer such loans. Generally, mortgage insurance is required due to low down payment and associated risk and not related to borrower credit characteristics or history.
Does mortgage insurance apply for investor properties?
PMI only insures loans on owner occupied residential properties (1 to 4 units).
What is private mortgage insurance?
Mortgage insurance is a type of insurance that helps protect lenders against losses due to foreclosure. This protection is provided by private mortgage insurance companies, and allows lenders to accept lower down payments than would normally be allowed.
Mortgage insurance also enables lenders to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows lenders to continue originating new loans.
Is private mortgage insurance different from other kinds of insurance associated with mortgages?
Private mortgage insurance protects the lender in the event of borrower default and subsequent foreclosure on the home. FHA and VA insurance also protect the lender against borrower default under a government program rather than through the private enterprise system.
Credit insurance, sometimes called mortgage insurance, is life insurance coverage that pays off the mortgage in the event a borrower dies, becomes disabled, or incurs loss of health or income. Fire, liability, and theft insurance cover the homeowner from losses according to the terms and conditions of their respective insurance policies.
How small can my down payment be?
Private mortgage insurance makes it possible for a home buyer to obtain a mortgage with a down payment as low as 5% and for low-to-moderate income home buyers as low as 3%. Such mortgages are popular today because potential home buyers are not able to accumulate the 20% down payment that is generally required by lenders if a loan is not insured.
Who pays for mortgage insurance?
The lender does, although they will generally pass that cost on to the borrower. Typically, a portion of the mortgage insurance premium is paid up front at closing, and the rest is paid as part of the monthly mortgage payment.
What are the payment options for mortgage insurance?
Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to- value ratio, type of loan, and amount of coverage required by the lender.
Under an annual plan, an initial one year premium is collected up front at closing, with monthly payments collected along with the mortgage payment each month thereafter. Monthly plans allow a borrower to pay the lender only 1 or 2 months worth of premium at closing, and then on a monthly basis along with the regular mortgage payment. Under a single premium plan, the entire premium covering several years is paid in a lump sum at closing. Typically, home buyers choose to add the amount of the lender's mortgage insurance premium to the loan amount. By doing this, home buyers can reduce their closing costs and increase their interest deduction.
Below are examples of how a variety of mortgage insurance premium plans could affect your mortgage payments:
Annual Plan Monthly Premium
Plan Single Premium
Loan Amount(*) $150,000 $150,000 $150,000
Cash for MI at closing $750 $56 $0
Financed Premium $0 $0 $3,000
Total mortgage amount $150,000 $150,000 $153,000
Monthly P&I(**) $1,317 $1,317 $1,343
MI Renewal $43 $56 $0
P&I plus monthly MI $1,360 $1,373 $1,343
(*)Loan amount of $150,000; 10% down payment; 30 year fixed rate loan at 10% interest.
(**)P&I stands for monthly Principal and Interest on the mortgage.
Can mortgage insurance coverage be canceled?
Mortgage insurance is maintained at the option of the current owner of the mortgage. In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, the degree of equity in the home is not the only factor that a lender may take into consideration. Note that the law in certain states requires that mortgage insurance be canceled under some circumstances.
How does private mortgage insurance differ from FHA insurance?
Although the insurance protection concept is similar, there are differences between private mortgage insurance and FHA. FHA insurance is a government-administered mortgage insurance program that does have certain restrictions. FHA has maximum regional loan limits that are lower than those with private mortgage insurance. FHA may be more expensive, takes longer to receive approval, and has fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private mortgage insurance which is cancelable in most circumstances. FHA is a good choice for some borrowers with credit history problems that might need special assistance.
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The different types of mortgage insurance available for Louisville Kentucky Fannie Mae Conventional Mortgage Loans
Annual Plan – The first year premium is collected at closing, and then monthly payments are held in escrow for the following year.
Monthly Plan – Two months of MI is paid at closing, then collected monthly as part of the mortgage payment.
Zero Up–Front Plan – Use that money for the down payment instead, as MI is paid monthly with the first mortgage payment, not at closing.
Single/Financed Premium – Entire MI premium is paid at closing, and can be paid with down payment assistance or financed into the loan.
Split Premium – A combination of single premium and the monthly plan; the seller can help with the up–front premium or it can be financed in, resulting in lower monthly premiums.
Single Premium Lender Paid Mortgage Insurance (LPMI)4– "Life of Loan" mortgage insurance that is paid after closing by the lender; no annual or monthly premiums or renewals.
|Jan. 20, 2015|
United Guaranty vs. FHA—There’s Still a Clear Choice.
There's been a lot of chatter recently surrounding FHA's rate cut announcement. United Guaranty is very supportive of FHA's role in extending credit to underserved markets. However, as some of the initial excitement about the announcement dies down, we wanted to take a moment to let you know that United Guaranty is here to help ensure you get the right kind of mortgage insurance for your borrowers.
First, even with the recent rate cut, United Guaranty's mortgage insurance premiums for most products and borrowers remain more attractive than FHA's. And with our Performance Premium® risk-based pricing, you can be sure you're getting the appropriate rate for each loan's individual risk profile.
Additionally, with United Guaranty, you don't need to worry about locking your borrower into MIP for the life of the loan. Borrower-paid mortgage insurance from United Guaranty is required to be cancelled automatically when the loan's LTV reaches 78 percent—something borrowers have told us is very important to them.
Senior Loan Officer
- Borrow no more than 80 percent of the home’s value.
- Find a lender willing to give you a first mortgage in an amount equal to 80 percent of the home’s value. Then see if that same lender, or a different lender, is willing to give you an equity loan for a portion of the balance you need for the purchase of your home. This option has been referred to as a piggyback loan. In many instances, the first loan will be for 80 percent of the home’s value and the piggyback loan will be for an additional 5 percent, 10 percent, or 15 percent. The more you want to borrow in the piggyback loan scenario, the harder it might be for you to obtain the loan and the higher your interest rate and costs might be.
- Obtain a loan for 80 percent of the home’s value and then have a family member gift you the difference you might need to buy the home.
- Apply for a FHA loan. (Note that a FHA loan may actually be more costly for you than obtaining a non-FHA loan with MI.)
- If you are buying a home, negotiate to have your seller pay the upfront MI cost. That cost could be negotiated as part of the contract, and the seller could pay your MI fee upfront as a closing cost credit. Once paid, you would not have to pay MI with that loan, but if you were to refinance that loan, you might then have to pay MI with the new loan.
- Have the lender include the MI fee as part of the interest rate that it might charge you. The interest rate might be a tad higher and last for the life of the loan, and you will still technically be paying MI, but this does give you an additional option.
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