Private Mortgage Insurance On Conventional Loans

Private mortgage insurance on conventional loans is required for conventional mortgage loan borrowers who put less than a 20% down payment on their home purchase.

• Unlike FHA Loans where the annual mortgage insurance premium is 0.85% of the loan balance, conventional loans private mortgage insurance varies
• Conventional Loans are called conforming loans
• The reason, why it is called conforming loans, is because they need to conform to Fannie Mae and/or Freddie Mac Guidelines
• Private Mortgage Insurance companies do not have to insure a borrower
• It is up to the private mortgage insurance company on what the price out the private mortgage insurance premium
• For example, both Fannie Mae and Freddie Mac raised their debt to income ratio caps to 50% DTI
• However, most private mortgage insurance companies will not insure debt to income ratio borrowers with over 45% DTI unless they have 700 credit scores

There are times where it is better to go with FHA Loans instead of Conventional Loans for borrowers with lower credit scores due to the higher premiums on PMI.

How Risks Is Analyzed By Private Mortgage Insurance Companies

• The more a home buyer puts down, the less lender has risk on the loan
• This due to the fact that statistics prove that borrowers with more skin in the game the less likelihood of a potential foreclosure and default
• Private mortgage insurance premium needs to be paid by borrowers but only benefits lenders
• Private mortgage insurance premium only benefits the lender
• It protects the mortgage lender in the event homeowners defaults on their mortgage

Private Mortgage Insurance On Conventional Loans Compared To FHA Mortgage Insurance

All FHA insured mortgage loan borrowers with 30 year fixed rate mortgages have mandatory annual FHA mortgage insurance premium which is set at 0.85%.

• FHA annual mortgage insurance premium for 15 year fixed rate FHA loans where the borrower can put a 10% down payment gets drastically dropped to 0.45%
• However, for private mortgage insurance on conventional loans, there is no set percentage amount of the mortgage balance
• Private mortgage insurance on conventional loans is calculated not just by the loan to value of the conventional loan, but other factors such as the following:
  • borrower’s credit scores
  • property type
  • debt to income ratios
• All of the above factors play a role in how much the private mortgage insurance on conventional loans premium will be

Choices Of Private Mortgage Insurance On Conventional Loans Programs

Unlike the FHA mortgage insurance premium, there are several private mortgage insurance offered by lenders.

• The traditional monthly private mortgage insurance premium is not the only option available to conventional borrowers
• There is the single mortgage insurance premium which is called upfront private mortgage insurance
• This is when borrower pay for one lump sum at closing
• The borrower pays a one time upfront conventional mortgage insurance premium and homeowners do not need to worry about paying the monthly private mortgage insurance
• Borrowers can pay the single-payment mortgage insurance with the seller’s concession from the seller
• The single premium financed mortgage insurance is equivalent to FHA’s upfront mortgage insurance premium

The mortgage insurance is financed into the balance of the mortgage loan.

Lender Paid Mortgage Insurance

Lender Paid Mortgage Insurance, also known as LPMI, is where borrowers do not pay any mortgage insurance. Conventional lenders will cover the annual mortgage insurance in lieu of a higher mortgage rate.

• The higher interest rates will be determined by the strength of the conventional mortgage borrower with regards to their credit scores and debt to income ratios.

Mortgage Insurance Requirements

The monthly mortgage insurance is when the borrower pays monthly mortgage insurance. This private mortgage insurance, again, is based on loan to value, the borrowers credit scores and the borrower’s debt to income ratios.  The monthly mortgage insurance premium can be canceled once homeowners have had the property for at least two years and also once the home’s loan to value reaches the 78% loan to value mark.  The value is determined by an appraisal.