5 FHA mortgage insurance alternatives every homebuyer should know

February 14th, 2013

by: Scott Schang, FindMyWayHome.com

FHA recently announced 2 incredibly costly changes to mortgage insurance premiums (MIP) that will leave homebuyers scrambling for alternatives.

April 1st, 2013 FHA will increase it’s annual mortgage insurance premium another 10bps to 1.35% of the loan amount for buyers with less than a 5% down payment.  The annual mortgage insurance premium is divided by 12 and added to your monthly mortgage payment.  On a $417,000 loan amount, this is an increase of $34.75, or $417.00 a year.  This may not sound like a lot if it wasn’t for the other announcement made by FHA.

Effective June 3rd, 2013 FHA will rescind the rule that mortgage insurance can be removed after 5 years and 78% loan to value.  For borrowers with 10% down payment or greater, this monthly payment increase can be removed after 11 years, for borrowers with less than 10% down, the mortgage insurance premium will stay in place for the full term of the loan.  If your intention is to keep your low FHA interest rate for the full 30 years, your total premiums will cost you $168,885!

 

Don’t have 20% down?

It is a common misunderstanding that conventional financing requires a 20% down payment.  This is not completely true.  What is true is that with 20% down on a conventional loan you can avoid mortgage insurance completely.

Conventional financing can be used with as little as a 3% down payment (compared to 3.5% with FHA) with Private Mortgage Insurance (PMI).  Private mortgage insurance has recently loosened qualifying guidelines to match Fannie Mae DU approvals $417,000.  Loan amounts above this may require additional qualifying criteria overlays from the mortgage insurance provider.

PMI offers several very flexible options that will save qualified homebuyers thousands, if not more, on premiums:

 

Borrower Paid Mortgage Insurance (BPMI)

BPMI offers highly competitive annual premium rates with no upfront mortgage insurance.  FHA currently requires both annual and an upfront MIP of 1.75% of the loan amount!  Using the example above of a $417,000 loan amount, this adds almost $7,300 to your financed loan amount.  Standard coverage for BPMI will cost you about 1.06% (source www.radian.biz) of the loan amount compared to FHA’s 1.35%.

 

Split Premium (BPMI)

Split premium provides borrowers with a PMI structured very similar to FHA with an up front premium that can be financed into the loan amount, and a significantly reduced annual rate that is paid monthly as part of your mortgage payment.

 

Single Premium (BPMI)

Single premium is a one time PMI premium that can be paid at closing that will leave a borrower with no monthly increase in your mortgage payment.  Home buyers that are receiving seller credits, lender credits or using down payment assistance programs can use that to “buy out” your mortgage insurance completely.

 

Lender Paid Mortgage Insurance (LPMI)

Lender paid is exactly what it infers, the lender covers the cost of the mortgage insurance by offering you a slightly higher interest rate.  This is a great option for borrowers that don’t mind paying a little bit more over a longer period of time.  While it sounds attractive to not have mortgage insurance, this option also means that you will pay significantly more over the life of the loan if you do not refinance or sell.

 

MyCommunityMortgage

The Fannie Mae MyCommunityMortgage offers reduced mortgage insurance for home buyers whose income does not exceed 140% of the area median income.  In addition to offering a PMI option that is less than half of FHA’s MIP rate, this program also offers reduced closing costs to those that qualify.

Speak to your lender about what PMI programs you might qualify for.  There may be debt to income and credit score restrictions on some programs.  There may also be alternative programs offered by different PMI providers.  Do you homework, and ask your lender which options might be available to you.

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