Private mortgage insurance, or PMI, is a typically standard required fee for borrowers putting down less than 20% of down payment. PMI is often seen negatively; however, it is essential to provide insight into the great opportunity it gives buyers shopping in this current market environment.
Despite many borrowers spending years saving up for a 20% down payment, PMI gives borrowers the flexibility of purchasing a home by purchasing a monthly or single insurance premium on the lenders’ behalf. Now that we understand what PMI is, it is also essential to know how much your borrower should expect to pay for PMI.
Some factors to consider when calculating PMI are:
- Loan Amount
- Down Payment
- Credit Score
- Debt-to-Income ratio
When your borrowers are advised that they will have PMI, there are options from which they may choose. For conventional mortgages, borrowers can pay for PMI in one lump sum at closing, set up a monthly recurring payment, or pay for a portion at closing to have a lower monthly payment for the remaining balance. Another option borrowers may have is Lender Paid Mortgage Insurance, LPMI, which typically results in a higher interest rate paid throughout the life of the loan. With interest rising in the current market, many borrowers may steer away from this option.
PMI is not necessarily permanent throughout the life of the loan. For conventional loans, PMI will be removed when 78% LTV has been reached based on the lower of the original purchase or appraisal if the monthly payment option is chosen. If your borrowers would like to remove PMI prior to this, this can be requested as well. Depending on the lender or servicer, this process often requires a new appraisal on the property to ensure that 80% LTV has been reached and PMI has been paid for a minimum of two years.
The options are endless for borrowers to find the home of their dreams nowadays. The best way to ensure borrowers will have a lower PMI payment is to have a higher down payment, a good standing credit score, and a low debt-to-income ratio. Thankfully, LendingPad is integrated with Arch Mortgage Insurance, Enact MI, Essent MI, MGIC, National Mortgage Insurance Corporation, and Radian Guaranty Inc. Our integrations allow our users to shop for the best rate for their borrowers.