Debt Free

If you thought lenders were making it tougher to get a mortgage, you’re right. In response to a spate of foreclosures and mortgage defaults, lenders have revised their lending practices recently. Even those borrowers with pretty good credit scores are finding it tougher to get a mortgage, even as mortgage interest rates are at very attractive levels. Now, to make add insult to injury to those folks out there trying to find financing for their new home, firms in the private mortgage insurance (PMI) industry are changing the rules in the interests of self protection. 

PMI has been required on homes with an equity level of below 20%. This protects the lender from default by the borrower. PMI reduction of risk for the lender has been instrumental in allowing first time homebuyers and others without the ability to scrape together a 20% down payment, the ability to finance a new home. Now however, as the result of the high level of defaulted mortgages, PMI providers are rethinking their level of exposure.

A few have decided to make changes that will make it more difficult to obtain PMI, and that, in turn, will make getting a mortgage more difficult. On Feb 11^th the PMI group announced they would no longer be offering PMI to borrowers with less than 97% loan to value.

On March 3^rd Mortgage Guaranty Insurance Corporation (MGIC) sent out a letter indicating they’d no longer provide PMI for borrowers with credit scores below 620 and if buyers had loan to value ratios of over 95%, they would now require a FICO score of 680. They had already announced they would no longer be approving insurance for borrowers having a LTV, no matter their credit score, who are living in certain real estate markets where prices have recently been declining. This includes the entire states of Florida, California, Nevada, and Arizona, in addition to 25 other real estate markets throughout the country.

What can you do as a consumer to mitigate the risk that these changing rules among PMI providers could affect your chances of getting a mortgage? There a few things;

1)                  How to Avoid Paying PMI  - Make sure your credit score is as high as possible. That will not only give you the widest range of options by ensuring that you’ll be above prospective insurer’s cut offs, it will give you lower interest rates on your mortgage and a wider array of lenders to choose from.

 

2)                  How to Avoid Paying PMI  - Some lenders will let you avoid PMI, but will charge you a higher interest rate to compensate for their increased risk. You can work with one of these lenders, and then refinance your mortgage when your home appreciates such that your LTV falls below 80%.

 

You’ll definitely pay for the privilege and in some areas of the country there’s no telling how long until real estate appreciates to the point where you’d have enough equity to refinance. This would mean you could be paying the higher mortgage payments for quite some time, rendering this a very expensive option.

 

3)                  How to Avoid Paying PMI - Increase your down payment to exceed the 20%. This isn’t an option many people will be able to take advantage of, but look at all your alternatives here. You may be able to borrow enough from other sources that you can make this work.

 

4)                  How to Avoid Paying PMI - Look at a cheaper property. If it’s possible, set your sights a bit lower so that you have the required 20% down payment. This may not work for your particular situation, but evaluate where you sit to find out if you can get an acceptable home for a lower price. It may be worth revising your expectations for your new home downward a bit so you can not pay PMI.

 

5)                  One popular way to avoid paying PMI has been what’s known as an 80/20 mortgage, where you actually get 2 mortgages, one for 80 % of the home and another for 20%. With the recent problems in the credit and mortgage industries, these are very hard to find now, as lenders have dropped many of their more creative financing options.

 

Bottom line: You can avoid paying PMI, but some of the options of doing so can end up costing you more money than just paying it until you no longer have to. Look at your individual situation to determine what works best for you.