What is PMI? | Key Cornerstone Realty

First time home buyers Carolyn Carpenter St Peters Mo Real Estate Pmi

PMI stands for Private Mortgage Insurance. It is a type of insurance that lenders often require when a homebuyer makes a down payment that is less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan, and it allows individuals with smaller down payments to access mortgage financing.

Here are key points to understand about PMI:

1. Purpose: The primary purpose of PMI is to protect the lender, not the borrower. It’s a risk mitigation measure for the lender in case the borrower is unable to make the mortgage payments and the property goes into foreclosure.

2. Down Payment Requirement: If a borrower makes a down payment of less than 20% of the home’s purchase price, lenders often require PMI. This is because a larger down payment provides the lender with more security and reduces the risk of the borrower defaulting.

3. Cost: PMI is an additional cost that the borrower must pay, typically as part of their monthly mortgage payment. The cost can vary based on factors such as the loan amount, down payment, and the borrower’s credit score.

4. Cancellation: Once the borrower’s equity in the home reaches 20% (due to a combination of payments and potential appreciation in the property’s value), they may be eligible to request the cancellation of PMI. However, some loans may have specific criteria that must be met before PMI can be canceled.

5. Types of PMI: There are different types of PMI structures, including borrower-paid PMI (included in the monthly mortgage payment) and lender-paid PMI (where the lender pays the insurance premium but may pass the cost on to the borrower through a higher interest rate).

6. Government-Backed Loans: For certain government-backed loans, such as FHA loans, a similar insurance premium is required. In the case of FHA loans, it’s called Mortgage Insurance Premium (MIP).

It’s important for homebuyers to be aware of the implications of PMI and factor it into their budget when considering a mortgage. Additionally, borrowers should stay informed about the criteria for PMI cancellation and work towards building enough equity in their homes to eliminate this additional cost over time.

Not all lenders will require PMI, but those that follow the Fannie Mae and Freddie Mac guidelines will.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that play a significant role in the U.S. housing market. They don’t make loans directly to consumers; instead, they purchase and guarantee mortgages from lenders, providing liquidity to the mortgage market. The guidelines set by Fannie Mae and Freddie Mac influence the eligibility criteria for loans that lenders sell to them. Here are some key guidelines:

Common Guidelines for Fannie Mae and Freddie Mac:

1. Credit Score:
– Generally, a higher credit score is preferred. Borrowers with higher credit scores are considered lower risk.
– Minimum credit score requirements may vary, but scores above 620 are often desirable.

2. Down Payment:
– Both Fannie Mae and Freddie Mac have programs that allow for down payments as low as 3% for certain loans (e.g., HomeReady for Fannie Mae, Home Possible for Freddie Mac).

3. Debt-to-Income Ratio (DTI):
– Lenders consider the borrower’s debt-to-income ratio, which compares monthly debt payments to gross monthly income.
– Typically, a lower DTI is preferred for loan approval.

4. Loan-to-Value Ratio (LTV):
– The loan amount in relation to the appraised value of the property is known as the loan-to-value ratio.
– Lower LTV ratios are often associated with lower risk.

5. Property Type:
– Fannie Mae and Freddie Mac guidelines cover various property types, including single-family homes, condominiums, and multifamily properties.

6. Loan Limits:
– Both GSEs set conforming loan limits, which are the maximum loan amounts they will purchase. These limits vary by location and are adjusted annually.

7. Documentation:
– Borrowers are required to provide thorough documentation of their income, employment, and financial history.

8. Loan Types:
– Fannie Mae and Freddie Mac purchase various types of loans, including fixed-rate and adjustable-rate mortgages.

9. Appraisal Standards:
– Properties financed through Fannie Mae- or Freddie Mac-backed loans must meet certain appraisal standards to ensure they represent fair market value.

10. Private Mortgage Insurance (PMI):
– Borrowers with down payments less than 20% often need to pay for private mortgage insurance, which protects the lender in case of default.

It’s essential to note that these guidelines can be subject to change, and lenders may have additional requirements. Borrowers should work closely with their lenders to understand specific eligibility criteria and to determine the most suitable loan options based on their financial circumstances.

Other Useful Information and Links