August 05, 2018
Although mortgage rules are relaxed enough so that lending requirements allow many to purchase without that standard 20% down payment, one cost of these allowances is Private Mortgage Insurance. We mentioned this insurance premium in the previous article about loan products.
All home mortgage applications must meet certain standards in order to be approved. These standards are known as underwriting and checking each detail makes up the bulk of time spent preparing a mortgage application.
In order for an application to be considered complete, underwriting requirements will include adequate information on the borrower’s credit and employment history in order to determine a risk assessment score. For that reason, any unique situations in employment or unusual credit history may require additional explanation, and even with a substantial down payment, a private mortgage insurance policy to protect the lender may be required.
Self-employed individuals or those with alternative forms of credit may find themselves needing to jump through a few additional hoops to meet the guidelines for the loan they desire.
The exchange for avoiding PMI premium payments up front often translates to lenders incorporating the cost into the loan. This means borrowers may pay a slightly higher interest rate.
What’s Involved in Risk Assessment scoring?
Strict lending requirements and banking policy now limit the number of mortgages with zero down payment options. Conventional mortgages and FHA both require private mortgage insurance whenever the down payment is less than 20% of the purchase price of a home.
However, FHA loans can be more flexible with the initial down payment requirements when a borrower has an adequate credit rating. FHA mortgage costs are now for the life of the loan. Lenders will of course look at mortgage insurance as risk protection for themselves.
This risk protection process may or may not require mortgage insurance in your home loan. For example, VA and USDA loans do not usually require mortgage insurance if the borrower’s credit and employment history meet certain guidelines.
Conventional loans with lower than the 20% down payment requirement may start out with a PMI payment included. However, once the principle has been paid down so there is at least 20% equity in the home compared to the principal of the mortgage, the PMI payment may be eligible to be dropped. This isn’t usually done automatically. The borrower must contact their mortgage provider about dropping mortgage payments.
Contact your local marketing specialist, who can provide you with helpful recommendations of lenders that may meet your needs as you prepare for your home purchase.