Mortgages Explained: How Much Will I Pay in Mortgage Insurance?

by Mortgage Nerd on November 16, 2011 · 0 comments

Mortgage insurance, unlike home owners insurance, is a necessary evil for most mortgage programs when you have less than 20% equity or down payment. It’s true that some lenders, that don’t work with Fannie Mae or Freddie Mac, don’t require any mortgage insurance but those lenders usually offer higher interest rates to compensate. If you found this article, it’s likely that you would like to know how much you will pay in mortgage insurance with your monthly mortgage payments. Well then, let me educate you!…

Mortgage Insurance with FHA Loans

By a long shot, FHA has the most expensive monthly mortgage insurance. As of the date of this article FHA requires an annual premium of 1.15% for loans with a LTV (loan to value) of 95% or greater and 1.1% for loans less than 95% LTV. This means that you will pay $9.58 per month for every $10,000 borrowed. On a $200,000 loan that is a whopping $191.60 per month.  Not only that but you will pay that mortgage insurance for a minimum of 5 years, even if you have 20% down payment. This is why FHA loans are usually reserved for those people that can’t qualify for a Conventional mortgage loan.

Important Note:  The mortgage insurance rates on FHA 15 year loans are significantly cheaper.

Mortgage Insurance with USDA Rural Housing Loans

For the longest time USDA Rural Housing loans didn’t charge a monthly mortgage insurance, until October 1st of 2011. Now, USDA charges an annual premium of .3%.  It’s almost a quarter of what you will pay for FHA mortgage insurance but it’s still a bummer because it didn’t use to exist. For every $10,000 borrowed, you will pay monthly mortgage insurance of $2.50. They also still charge an upfront “funding fee” of 1%, just like FHA.

Very Important Note: The mortgage insurance with USDA loans is for the life of the loan! You will never stop paying it unless you pay off the entire mortgage, even if you get to 20%, 50%, or 99% equity.

Mortgage Insurance for Conventional Loans

Not as cheap as USDA mortgage insurance but at least with Conventional mortgages they use some common sense and give you a rate based on your credit score and loan to value.  For example, somebody with a 740 credit score and 15% down payment is going to have a much cheaper rate than somebody with 5% down and a 700 credit score. To me this makes a lot of sense and is the way it should be with every mortgage insurance program.

Here are a couple examples of Conventional mortgage insurance rates…

For a loan transaction with 5% equity or down payment and 740 or higher credit score the annual premium will be anywhere from .77 to .94% (depends on the private mortgage insurance company). Because rates do differ between PMI companies you will want to make sure that your loan officer has the ability to shop around for you.

Somebody with 10% down and a 700 credit score will pay anywhere between .64% and .85% in annual premiums.

Single Premium Mortgage Insurance: The Mortgage Insurance Buy-Out

This is one of my favorite mortgage insurance options for borrowers getting a Conventional loan and it can make a lot of sense for somebody that is going to keep their loan for at least a couple of years. With this option you can pay a one-time buy out fee as part of your upfront closing costs and not have to pay any monthly mortgage insurance.  The beautiful thing about it is that you can finance the fee. For example, somebody with 5% down and a 760 credit score could pay a fee of 1.95% of the loan amount to buy out of monthly mortgage insurance.

On a loan amount of $100,000 that is a fee of $1,950. If you choose to finance it, it would make your full loan amount $101,950.  This raises your monthly payments by several dollars instead of the $80 or so dollars with monthly mortgage insurance that could take 7 to 10 years to get rid of (assuming you make minimum payments).

Conclusion

Mortgage insurance is one of the variables that few people take into consideration when they are choosing their mortgage. In my opinion, it is one of the biggest variables that you should take into consideration.  Right now, because of the great options that Conventional Loans offer for mortgage insurance and the high level of mortgage insurance that FHA is charging, if you can qualify for a Conventional loan than it is a no-brainer.

 

 

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Can I Refinance With Negative Equity?

by Mortgage Nerd on November 3, 2011 · 2 comments

The sad and frustrating reality for many homeowners today is that they owe more on their mortgage than their home is worth. I am in that same boat as I owe owe about 105% of what my home is worth so I can relate to the frustration. Normally in this situation you wouldn’t be able to refinance to take advantage of the incredibly low interest rates, but thanks to a couple mortgage programs that the government has spearheaded it is possible to refinance with negative equity.

FHA Streamline Refinance Without an Appraisal

If you have an FHA mortgage on which you owe more than the value of your home you can still take advantage of refinancing to a lower interest rate by doing the FHA streamline refinance (without an appraisal). This program allows you to use the appraisal from your most recent FHA mortgage transaction, instead of doing a fresh one. This means that you save the cost of an appraisal (anywhere from $375 to $475) and that you can meet the 2.25% equity requirement that FHA requires on a refinance.

What’s the downside to this program?… The downside is that FHA won’t allow you to roll in any closing costs into your loan balance if you opt out of doing an appraisal. This means you will either have to pay for the closing costs out of pocket or take a higher interest rate so that your lender pays your closing costs for you (also referred to as a “no-cost refinance”, duh!). Another potential problem with an FHA refinance is that they are currently charging an annual mortgage insurance premium of 1.15% for loans with an LTV over 95% (1.1% for LTV’s under 95%….big whoop!). Many people that have FHA loans are only paying a .55% annual premium and so it’s possible that the higher mortgage insurance premiums eat up a big chunk of your interest savings.

Fannie Mae DU REFI PLUS

This program is for all you people that got Conventional mortgage loans that were sold to Fannie Mae. To find out if Fannie Mae owns your loan, you can use this Fannie Mae Lookup tool.  Lenders like Wells Fargo, Bank of America, Citi-Mortgage, MetLife, etc. etc. will sell the loan to Fannie Mae without your knowledge because they continue to service the loan, take your payments, etc.

In a nutshell, this program allows you to refinance your mortgage up to a loan to value of 125%, meaning if you owe $125,000 on your home the appraisal only has to be $100,000.  You will be required to still qualify regarding income and credit and your loan must be owned by Fannie Mae. This is one of those programs where it might be easier to qualify with your current lender because they may grant you an appraisal waiver.

The interest rates on this program may be a little bit higher than a standard Conventional loan but it might also be a little easier to qualify because the guidelines aren’t as strict.

Freddie Mac Relief Refinance

This is basically the same program as the Fannie Mae DU refi plus but for those people whose mortgages are owned by Freddie Mac. Use the Freddie Mac Loan Lookup tool to find out if Freddie owns your mortgage.

The biggest difference that I have seen with this program is that it is not as easy to switch lenders as with the Fannie Mae program. If you are currently paying mortgage insurance it will be impossible to switch lenders. In fact, it may be impossible altogether to use this program if you are paying mortgage insurance, but a few lenders do allow it. You would continue to pay the same mortgage insurance premiums that you currently do. Also, be aware that this applies to those mortgages that have lender-paid mortgage insurance (where you took a higher interest rate but don’t pay monthly mortgage insurance).

Possible changes on the horizon

The recent rumor about the Fannie Mae and Freddie Mac relief programs has been that the government is going to lift the 125% LTV rule and allow anybody that qualifies to take advantage of the program, regardless of the value of their home.  This would help significantly more people because there are many people that owe more than 125% of the value of their home. With interest rates as low as they are (around 4% on a 30 year fixed as of 11/2/11) many people would be able to lower their mortgage payments and stay in their homes.

 

 

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What is the 4506-T Form?

by Mortgage Nerd on October 29, 2011 · 0 comments

In a nutshell the 4506-T form is an IRS form that your mortgage lender uses to retrieve a transcript of your tax returns. They use this transcript to match the #’s against the W2′s, 1099′s, and 1040′s (tax returns) that you submit to your loan officer. It serves as a validation tool for mortgage underwriters to make sure that your tax returns are legitimate, and is a requirement for most loan files.

4506-T came about because of mortgage fraud

A few years ago the 4506-T was used solely as an auditing tool for lenders and was executed on maybe 1 in 20 files. Lenders started realizing that way too many people had two sets of tax returns; One set for the IRS that was drawn up to pay fewer taxes, and another set for the lender which showed more income, allowing them to buy more house. Dishonest bastards I know! Now honest people can be hurt by this 4506-T form. I’m gonna tell you how!

An example of how the 4506-T form killed a file

I recently had a borrower that was receiving a pension from Puerto Rico and thus she filed tax returns in Puerto Rico. Obviously her 4506-T results didn’t show any income from a US tax return. Even though she had pay stubs, W2-PR’s (Puerto Rico W2′s), and her bank statements showed the direct deposit from the pension, we weren’t able to use this income because it didn’t show up on the 4506-T. Puerto Rico does have a form that is similar to the 4506-T but my borrower didn’t want to wait for the 4 to 6 months that we were told it would take.

4506-T Waiver

There is a waiver that can be executed by some lenders so that Fannie Mae or Freddie Mac will purchase a loan without a 4506-T. For example, if you have “non-taxable income” such as social security benefits and you don’t file a tax return than this would be a good reason to get a 4506-T waiver. Also, if you were late filing your tax returns and the 4506-T didn’t show any income for this reason, you may be able to get a 4506-T waiver if you can prove that you filed an extension on time and also if your file has some strong compensating factors, such as good credit and strong employment history.

Conclusion

I have mentioned before that getting approved for a mortgage these days really has nothing to do with you being able to afford the mortgage payments. It’s really more about being able to provide the proper documentation that Fannie Mae and Freddie Mac require. For this reason, “common sense” lending is dead. The more you understand this fact the better experience you will have with the mortgage application process.

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Why Is The Underwriter Asking For That?!

June 23, 2011
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I hear this statement a lot!…”Why is the underwriter asking for that?!” Lately my response has been…”Because mortgage underwriters don’t use common sense any more”. I know I know,  it’s a terrible explanation but it’s a lot better than what I use to say as a newbie loan officer…”Because it’s their money and we have [...]

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Is interest on a 30 year mortgage front-end loaded?

May 28, 2011
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Buying a home can be such an exciting new venture. However, it is not uncommon for new homeowners to become quickly disenchanted with home ownership when they realize how slowly they are paying off their 30 year mortgage. It happened to me when I bought my first house.

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Why was my loan application denied?!

May 7, 2011

“But my loan officer said that I was approved!” is heard all too often in the mortgage world these days. In this article we will explore a couple reasons why a borrower can be approved immediately after the initial loan application but eventually denied once the lender’s underwriter gets a hold of the file. Most [...]

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Underwriting for Beginners

April 26, 2011

When I first started out as a loan officer my manager taught me about an acronym to help me understand the basic principles of mortgage underwriting. And I think that it could be helpful for somebody that is looking to get a mortgage. The acronym is PACIT and it stands for: Property: This is the [...]

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Mortgages Explained: Is FHA or USDA Rural Housing the Better Loan?

April 14, 2011

In this article I will be comparing two of the most popular loan programs for first time home buyers, FHA and USDA Rural Housing. I don’t think that one program is inherently better than the other but they do offer unique advantages, depending on your situation. Because of this, it is imperative that you understand what these advantages are.

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Mortgages Explained: The USDA Rural Housing Home Loan

April 7, 2011

Important request by the author: Before you disregard this article because you don’t think you will ever own a home in a rural area, please see the USDA website to find out which areas in this country are considered “rural” by the USDA. I think you will be pleasantly surprised that this program may be [...]

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Mortgages Explained: Getting a Mortgage Doesn’t Have to be Stressful

April 5, 2011

Unless you have been living under a rock for the last 2 years you have probably heard from a family member, friend, or coworker about how difficult it can be to get a mortgage. It’s true that lenders have become more strict regarding the credit worthiness of those applying for a mortgage but the loan process does not have [...]

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