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What is Private Mortgage Insurance and why am I paying it?

What is Private Mortgage Insurance and why am I paying it?

Clinically put, Private Mortgage Insurance, or PMI or MI, is insurance that will help to protect a lender from loss in the case of a default by the borrower. MI is almost always required on loans with less than twenty percent equity. That means, if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your home’s value, you will be required to pay mortgage insurance. While it is a payment that the borrower pays to insure another party, it does have its benefits.

How is mortgage insurance charged?

There are a couple of ways MI is charged. There is Monthly MI, which is computed based on various factors such as credit score, LTV(Loan to Value), and term, then there is MIP(Mortgage Insurance Premium) which is charged up front, and most of the time added to the loan amount. Some programs charge one or the other, while some, (Gulp) charge both. In some cases, there is an add on to the interest rate which pays the premium, called Lender Paid MI. (LPMI)

Why should I pay MI?

Simply put, if you don’t have 20% to put down on a mortgage when you purchase or refinance, then be happy you get to pay MI. For example, in Kansas City and St. Louis, the average home sales price is right at $145,000. I don’t know about you, but I didn’t have 20% down ($29,000) sitting around in my checking when I purchased my first home.

Having MI to purchase a home allows most buyers to get into a home with as little as 2.5% down in some cases. So without the benefit of MI, purchasing a new home would be very difficult.

However, here are some tips to be as efficient as you can with the premiums you pay.

How to pay as little MI as possible

  1. Save as much money as you can. The larger the down payment, the lower the MI, and/or MIP.
  2. Keep your credit score as high as possible. Remember, the minimum score to get a home loan these days is 640. The higher the score, the lower the MI.

How to get out of paying MI if you are already paying

  1. Most MI contracts cancel when you pay the loan amount down to 78% of the original value of the home at purchase or value on the last refi. However, that takes almost 10 years if you put down 5%.
  2. The 2nd way to get out of paying MI, is by refinancing your home assuming you have built up 20% equity through a combination of principle payments and appreciation. However if you are content with your existing loan, you should call your lender to see on what conditions they will cancel your MI.

To summarize, while MI is a premium you pay to insure someone else’s interest, it helps people buy homes and refinance homes with less that 20% equity and with some good planning and discipline, there are ways to keep the premiums to a minimum.

Filed Under: First Time Home Buyer, home purchase, Kansas City Mortgage, Kansas City Mortgage Rates, Kansas City Mortgage Refianance, Mortgage Questions, St. Louis Mortgage, St. Louis Mortgage Rates, St. Louis Mortgage Refinance Tagged With: , , ,

5 Tips to Improve your Credit, to Qualify for a Mortgage

 

5 Tips to Improve your Credit, to Qualify for a Mortgage

Of the potential borrowers that apply through either of our St. Louis or Kansas City mortgage offices that get turned down, the major reason is due to credit score (minimum required is 640) and the other is due to value.

While there is nothing we can do in the near term about value (from the housing crisis), here are some tips to improve your credit score that can help you in the next 30-180 days.

1. Pay your bills on time. Do not pay them late. Call this the sarcastic “OMG” part of our blog, but this makes up 35% of your credit score. It is important to note, that paying your bills late, also means:

  • Paying late, but paying the late fee. You are still marked as paying late.
  • No longer paying your car loan because you “gave it back” is still paying your bills late. “That’s not a repossession, we gave it back”, is not a viable argument.
  • Allowing a debt to go to collection because you “disagreed” with the charge is still marked as paying late. You need to pay the debt to avoid the late mark then get your money back from the creditor.

2. Keep the Balances on Revolving Accounts Low.

For example, if you have a credit card with a $10,000 limit, and:

  • You owe $10,000, that is bad. This means you are maxed out.
  • You owe $100, that is Good! This means you have financial room.
  • You haven’t used that credit card for a while, don’t close it out. The capacity to have access to credit helps your score.

3. Adding a Spouse as an Authorized User:  This works for the situation where one spouse has a higher, qualifying score, but the other does not, but both borrowers income is needed to qualify for the loan.

If your spouse has available credit on their credit cards when you have little credit or little available, then ask to be added as an authorized user. This will help both borrower’s score if you need a few more points.

4. Adding a Secured Credit Card: I’ve mentioned before that credit card utilization accounts for 30% of your score, so if you’re having trouble getting a credit card, then apply for a secured credit card. We’ve had success referring borrowers to Orchard Bank, www.orchardbank.com.

5. Use Department Store Credit Cards as a Last Resort: While they can help, department store credit cards usually keep a low credit limit, consequently, are easy to max out, and can’t be used at a wide variety of stores.

By using a couple of these tips, hopefully that may result in an increase in score just enough to qualify or keep the rate you qualify for as low as possible.  

Filed Under: Home Loans Tagged With: , , ,

Before You Cut up that Credit Card.

Before You Cut up that Credit Card.

Should I cut my credit cards up, so I Never use them Again?

Effective credit card utilization makes up 30% of your score so Listen UP! We often hear our customers say, “I’m closing this credit card and cutting them up” believing this will help their credit. However, I’m here to tell you that it helps in some cases, but hurts in others. Here are some helpful tips.

If You Don’t use it, Don’t Lose it.

One of the criteria we are scored on by the credit repositories is length of credit history. So don’t close that credit card even if you haven’t used it for a long time. Closing out old credit cards shortens that history, and consequently makes your credit viewed as riskier than borrowers with longer histories.

If there’s a balance, don’t close it.

This is the proverbial frustrated couple that says, “I’m closing out those credit cards and cutting them up”. Closing a credit card with a balance is like a double whammy. When you close a credit card with a balance, your total available credit and credit limit report as $0, but now has a balance. So the credit card that had available credit on it now looks like a maxed out credit card, which is very bad.

If your credit card is your only one, Don’t close it

Since part of your credit score (10%) is based on the different types of credit you have, keeping a credit card in the mix will add points to your credit score. Leave your credit card open to show that you have experience with this type of revolving account. Frequently, if we are trying to get a customer to qualify for a mortgage, and they score just short of the 640 minimum score, we often direct them to a bank that offers a secured(one that requires a deposit) credit card to raise their score to qualify.

So after all that, when should I close one?

Close credit cards if you have enough other revolving accounts with low balances and/or the terms or conditions are such that the drawbacks or costs outweigh the benefits of having them. In this market, a couple of points to your score means a lot in terms of qualifying for a mortgage or getting the best interest rate possible.

So to wrap it all up, in rare cases, cutting up your credit cards and never using them again helps in some cases, however, in more cases that not, its best just to have a little bit of discipline, organization and good old common sense.

Filed Under: Home Loans

Understanding the New HARP Home Refinance Program.

money home1 1024x680 Understanding the New HARP Home Refinance Program.

Understanding the new HARP home refinance program.

Effective December 1st, 2011 new changes to the government’s Home Affordable Refinance Program (HARP) offer hope for homeowners paying their mortgages on time, but unfortunately owe more than their home is worth.

Here’s a look at some of the key elements of the changes to the government-backed mortgage refinance program, announced by the Federal Home Finance Agency (FHFA).

Loan-to-value restriction reduced

The first thing that jumps out is how far your home has fallen in value since you took out your mortgage is no longer a consideration.

Previously, HARP limits triggered if your mortgage balance exceeded your home value by more than 25 percent. That limit has been totally eliminated, making refinance even if your home value is a third of what you owe on your mortgage, or even less!

Fees Reduced

The new HARP rules waive certain fees charged at closing, particularly for borrowers who choose to refinance into 15- or 20-year fixed-rate mortgages. Closing costs have been seen as a barrier to HARP financed transactions, so FHFA is hoping that waiving these fees will attract more interest to refinance. With values no longer an issue, appraisals are no longer required, provided a reliable automated estimate is available, provided participating lender overlay’s do not say otherwise.

Some fees associated with closing costs on the new loan, however as customary with most refinance transactions, can be financed into the new mortgage.

What types of Loans are covered under HARP?

HARP transactions are available to borrowers who have mortgages backed by Fannie Mae or Freddie Mac. To find out if your loan is already owned by Fannie or Freddie, you can check on their websites at www.fanniemae.com or www.freddiemac.com . The Fannie or Freddie owned loan must have been on their books prior to May 31st, 2009. One to 4 unit dwellings.

Who’s eligible?

Provided your loan is already owned by Fannie or Freddie, you are required to have been current on your mortgage payments for the last six months and been late a maximum of once in the last 12 months.

How much can I save?

Underwater borrowers refinancing through the program will save an average of $2,500 a year on their mortgage payments, or more than $200 a month, according to Shaun Donovan, Secretary of the Department of Housing and Urban Development. The government estimates the changes to the program will benefit up to 1 million people, although Moody’s Analytics puts the figure at 1.6 million. The Obama administration may be a bit cautious after their original estimates for borrowers helped by the current version of HARP and its companion HAMP loan modification program turned out to be too optimistic.

What kind of loans can I get?

This is a significant change from the current HARP. The administration is encouraging underwater borrowers to refinance into short-term 15- and 20-year fixed-rate mortgages by waiving most or all program fees for those loans. The current program mandates that borrowers refinance into 30-year fixed-rate mortgages only. Homeowners will still be able to refinance into 30-year loans if they wish, but they’ll have to pay more fees if they do. Combined with the ultra-low rates now available on 15-year mortgages, that’s a significant prod for borrowers who’ve been in their homes a number of years to shorten up their term and start building back more quickly toward positive equity.

Filed Under: Home Loans, Mortgage Questions, Refinance, St. Louis Mortgage, St. Louis Mortgage Refinance

How Can I Get a Mortgage if I’m Self Employed

For many small business owners, the economy has been tough. With tightening mortgage regulations, qualifying for a mortgage has been tougher, causing many applicants to ask, “How can I qualify for a mortgage if I’m self employed”.

Here are 5 tips for a smooth mortgage application for a self employed person.

1.      Understand the income you make:

Ever heard of the saying, “Give me the bottom line”? The saying has roots in the financial industry.  Sure you may have grossed $150,000 last year(Top Line), however, writing off $140,000, leaves you with a Bottom Line of….you guessed it $10,000. So lenders are forced to qualify a borrower making $10,000 per year which won’t buy you much of a home in this day and age.

Gone are the days of writing your income on a loan application with no supporting documentation. Today all qualifying income must be documented.

2.      Keep a separate business bank account:

This one is important if you have a car or credit card that the business pays for. For example, if John owns John’s Painting Company in St. Louis and pays for his Chevy truck out of his business account, the debt won’t be counted against his mortgage application.

3.      Document! Document!

With very few exceptions, lenders are requiring 2 years tax returns for all self employed applicants. In the case of business owners that own a separate corporation, 2 years personal returns and 2 years corporate returns are required.

4.      Know your Credit Score.

The industry standard qualifying score has moved to 640. However, the national average is approximately 690. Coupled with the risk “layer” of being self employed, the higher your score, the smoother your loan application will be.

5.      Show your assets:

Similar to #1. No mattress money. The more assets we can show, the more likely you look to be able to weather any financial storm that may hit.

To summarize, rates are low, and those same amazingly low rates are available to all of those that can document what they make, it just takes a little more work and planning!

Filed Under: First Time Home Buyer, Home Loans, Mortgage Questions, Refinance, Stated Income Loans

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