Mortgage insurance is a useful tool that makes homeownership more accessible to would-be buyers who are unable to save the traditional 20% down payment to buy a home.
As a real estate professional, you have a unique opportunity to introduce your prospective buyers to the concept of mortgage insurance. When you explain how mortgage insurance makes it possible to buy a home with a lower down payment, you can gain new clients, help more people, and close more deals!
You can consider this article as your cheat sheet for mortgage insurance.
What is Mortgage Insurance and Why Do Some Borrowers Need It?
Mortgage insurance is an insurance policy that helps to protect lenders in case a borrower defaults on the loan. This added protection allows lenders to issue home loans to buyers with lower down payments than would otherwise be acceptable.
Generally speaking, homebuyers with a downpayment of less than 20% need mortgage insurance.
Are There Different Types of Mortgage Insurance?
There are different types of mortgage insurance policies to accompany different mortgage loan types.
1. Private Mortgage Insurance (PMI) for Conventional Loans
Well-qualified homebuyers can get a down payment as low as 3% using a conventional loan with PMI. A conventional loan is any loan that is not backed by the US government.
2. Mortgage Insurance Premiums (MIP) for FHA Loans
Homebuyers can potentially secure a home loan with as little as 3.5% down using an FHA loan with MIP.
FHA loans are a good option for buyers with credit score concerns because the Federal Housing Administration backs the loan, allowing lenders to relax their credit score requirements.
It is important to note that all FHA mortgages require MIP, even if the downpayment were to be greater than 20%. This is because the extra risk to the lender comes from the borrower’s lower credit rating as much as from the down payment amount.
3. Loan Funding Fees for VA Loans
With a VA loan, qualified borrowers could potentially buy a home with no money down. VA loans are specifically reserved for military service members, veterans, and their spouses. These loans are backed by the Department of Veterans Affairs.
VA buyers pay a “loan funding fee,” which serves the same function as mortgage insurance. In some cases, the fee may be waived. For example, if your buyer receives VA compensation for a service-connected disability, they can apply for a fee waiver.
4. Loan Guarantee Fees for USDA Loans
USDA loans offer a 0% down payment option for qualified buyers in rural areas. These loans are backed by the US Department of Agriculture, with the goal of incentivizing low-to-moderate-income buyers to purchase property in less densely populated regions.
USDA loans require mortgage insurance in the form of a “guarantee fee.” The guarantee fee consists of an upfront payment plus annual payments.
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance depends on the type of mortgage insurance.
- Conventional PMI: The cost varies depending on factors like the loan amount, the down payment amount, and your buyer’s credit score. The average cost of PMI ranges from 0.58% to 1.86% of the original loan amount per year.
- FHA MIP: FHA mortgage insurance premiums cost 1.75% of the loan amount. Your buyers can pay this premium upfront or roll it into the loan and make monthly payments on it instead.
- VA Funding Fees: The VA funding fee is currently 2.3% of the loan amount for first-time home purchases using VA financing and 3.6% for subsequent VA purchases by the same buyer. If your client can put down 5% to 10%, the fee is reduced to 1.6% (regardless of whether this is a first purchase or subsequent purchase). And if your buyer can put down more than 10%, the fee drops to 1.4%.
- USDA Loan Guarantee: The USDA loan guarantee fee is currently 1% of the loan amount upfront plus .35% of the loan amount annually. Your buyers can roll these fees into their loan to pay in monthly installments rather than lump sums.
Can Borrowers Cancel Mortgage Insurance?
Borrowers might be able to cancel their mortgage insurance once the remaining loan is less than 80% of the property’s market value.
For conventional loans, your buyers could request a cancelation of the mortgage insurance by contacting their lender. The lender will likely require a home appraisal to confirm the value of the property before agreeing to remove the mortgage insurance requirement.
For government-backed loans, the mortgage insurance and fees typically apply to the full term of the loan. However, your buyers might qualify for a mortgage refinance, in which they replace their government-backed loan with a conventional loan. They would need to meet income and credit requirements to refinance. And the remaining loan balance would need to be less than 80% of the property’s market value to qualify for a mortgage-insurance-free conventional refi.
Tips for Talking to Your Clients About Mortgage Insurance
- Focus on the benefit to the homebuyer. Yes, there is a cost for mortgage insurance. And, while this fact needs to be explained, it doesn’t need to be the focus of your conversation. The focus should be on the idea that mortgage insurance makes homeownership accessible by enabling buyers to make lower down payments.
- Keep it simple. Mortgage insurance is a complex topic. And your buyers may already be overwhelmed with the home-buying process. So your introduction to mortgage insurance should be a high-level overview, focusing on the key points. There will be time for more information as the home loan application process progresses.
- Refer your buyers to a helpful lender for additional details. You have enough on your plate without staying up-to-date on every mortgage insurance program and their respective requirements. Once you explain the basics of mortgage insurance, put your clients in touch with a lender who can explain the fine print.
How Keller Home Loans Can Help
Do you have prospective buyers with concerns about qualifying for a home loan? Or do you simply need a knowledgeable lender to help you streamline the mortgage loan process for your buyers?
Keller Home Loans can help!
We offer support for real estate agents and their buyers with offer-ready pre-approvals and competitive loan programs. Plus, with My Agent Station, you can keep track of your buyer’s financing status as you near closing day.
Partnering with Keller Home Loans allows you to provide more comprehensive service to your buyers, leading to increased client satisfaction and more repeat business.