But Leave It Behind At The First Opportunity
If you thought that borrowers have to put a twenty percent down payment on a home to conventional home loans, you would be pleasantly surprised to find that this is not the case in fact. Borrowers can purchase insurance on conventional loans. The innovation of private mortgage insurance or PMI has been enabling buyers to acquire homes with minimal down payments for many years now.
The Lender’s Side Of Conventional Loans
Conventional loans come from corporate financial institutions, whose objective is to invest capital and receive income in return. The practice of banks and other lenders has been to mandate a deposit of twenty percent, or more; this is not only a tradition it is a firmly established business practice of the financial industry.
Fluctuations in the market value of real estate and the cost of a forced sale mean that in all probability, an investor can be reasonably confident of recovering 80% of full market value in the unfortunate cases when loans result in foreclosure, it is also the difference between the retail and wholesale values of real estate.
However, finance companies want to reach out to the large pool of consumers who do not have access to large piles of cash to invest. The solution has been to insist that borrowers purchase mortgage insurance.
Extending Loan To Value Ratios With Private Mortgage Insurance
The deciding factor in lending is the loan-to-value ratio or LTV, where 80 percent of, say, a $360,000 loan is $288,000, and the down payment would be $72,000. So, for a lender to underwrite a loan for more than the wholesale value of property, the most important requirement is that their additional investment must be insured to account for any potential losses.
PMI exists to bring the risk of a low down payment conventional home loan in line with the acceptable investment standards of mortgage lenders. Government-backed loans provide a similar protection in which the agencies that sponsor them provide the insurance.
FHA And the VA do not make loans, but they are in the business of promoting homeownership. FHA does this by providing mortgage insurance for the portion of loans over 80%. VA loans can be up to 100% without any insurance requirement.
The cost of PMI derives from the value of the loan and the credit score of the applicant. Using the above example, you put down 5% or $18,000; you need insurance on $342,000, which might cost between $86 and $428 a month, depending on how you qualify. This amount will be added to your monthly payment for as long as your loan balance has a LTV ratio of greater than 80%.
One significant difference between mortgage insurance on FHA and conventional loans is that with PMI, once your outstanding LTV ratio is below 80% it can be terminated, this can mean a significant reduction of the monthly payment.
PMI offers the opportunity for consumers to purchase homes on conventional loans that they would not otherwise be able to afford, it is a classic win-win situation. Lenders can safely make loans to a market segment that otherwise would not be able to purchase homes and consumers can achieve home ownership and build wealth for the future.