UPDATE: Eliminating mortgage insurance from a conventional loan

Video Transcript: 

Hey, I’m Evan Swanson of Swanson Home Loans, a division of Cherry Creek Mortgage Co. Inc. In today’s video, I’m going to talk to you about getting mortgage insurance eliminated from a conventional mortgage.

Back in February, I recorded a VIDEO which talks about the details of the Homeowner’s Protection Act, which is the federal statute which governs this topic. However, in my hand, I’m holding a Fannie Mae Mortgage letter, 2018-03, this document was released in mid-July and this changes the rules for Fannie Mae secured mortgages for consumers to get their mortgage insurance eliminated.

Now these particular rules only apply to Fannie Mae secured loans for now. If you have an FHA loan, a Jumbo mortgage, or loan which was secured by Freddie Mac, these rules may not apply. Also, in this video I’m only going talk about a primary residence one unit single family residence. I’m not going to talk about investment properties or two to four units. Those rules are slightly different.

The good news in this document is Fannie Mae is trying to make it easier for consumers to have their mortgage insurance eliminated. They talk about three different scenarios.

1) Getting the mortgage insurance eliminated based on the homes original value so a consumer has paid down the principal to have the mortgage insurance eliminated. Prior to these rules in order to have the mortgage insurance eliminated, a consumer would have to wait until the loan was scheduled to reach 80 percent of the original value of the home regardless of additional principal payments. What Fannie Mae is saying in this document is that they will now take into account the actual principal balance. So if you have made additional principal payments, then they will go off that without having to wait until the loan was originally scheduled to reach that point.

2) You want to take into account the home’s current value. In this scenario, the home value has gone up. It’s appreciated in value and you want the loan servicer to take that into account when determining the loan to value. Prior to these rules you’d have to pay for an appraisal or a broker price opinion and that particular document would create the value that the lender would use. What Fannie Mae is doing is they’re releasing an automated valuation system, it’s not going to be available until spring of 2019, but at that point, loan servicers will be able to cross check the current value of the property with the statistical model and if that valuation supports a loan to value of 80 percent or less, then the mortgage insurance would be eliminated assuming the loan is at least five years old.

If the loan is between two and five years old, Fannie Mae says the loan to value would have to be 75 percent. If the valuation in the statistical model does not support a proper value to have mortgage insurance eliminated, the consumer can still opt to get a broker price opinion or an appraisal to try to get the mortgage insurance eliminated.

3) If you’ve made improvements to your property that have increased the value, then you will have to provide the loan servicer with a detailed list of the improvements that have been made. Then they can go ahead and use that statistical model and if that doesn’t support a broker price opinion or an appraisal can substitute this. Basically the loan servicer can take into account additional improvements in value.

If you meet any of those guidelines, good news ahead. Starting January 1st of 2019, these new rules take effect and it should be easier for consumers to get mortgage insurance eliminated. If you have questions about your scenario, we’d love to be your resource for you. Thank you for the opportunity, we look forward to chatting with you soon.

Eliminating mortgage insurance from a conventional loan


Video Transcript:

Hey there, Evan Swanson here to talk to you today about the elimination of mortgage insurance premiums from a conventional conforming loan.

There seems to be a lot of misinformation and confusion out there about when a consumer can get mortgage insurance premiums eliminated from their mortgage payment.

I like to describe it to customers from a best case and a worst-case perspective. Worst case is what’s written in the law under the Homeowners Protection Act, which is the federal statute, which governs this topic.

What that law says is that a lender can require mortgage insurance premiums to be paid so long as the remaining loan balance is scheduled to be above 78%-80% of the home’s original value. Original value is defined as the lessor of the purchase price or appraised value at the time the loan was taken out.

Worst-case scenario:

On a conventional conforming loan today, with 10% down at today’s interest rates it could take a consumer upwards of 6 years before they reach the point at which they have enough equity that they can have the mortgage insurance eliminated.

Best-case scenario:

Many loan servicers will allow consumers to get out of the mortgage insurance sooner than that, even though federal law doesn’t require them to. I’ve seen policies, which state that after a year, if the consumer has paid down the principle to below 80% of the original value, they can have the insurance removed.

I’ve seen others that show after two years, with the cost of an appraisal, if the consumer can demonstrate a 20% or more equity position that the mortgage insurance can be eliminated at that time. Typically, all these are going to require a clean payment history and some sort of documentation to the lender that the value on the property is what it is.

If you want to learn more about your options to eliminate mortgage insurance or if you want to ask questions, I’d love to be a resource for you and your family. Please, let me know how I can help. Have a great day.

What, when, why mortgage insurance?

Video Transcription:

Hi! Evan Swanson here to talk to you today about mortgage insurance. What is mortgage insurance, when is it required, and why do banks require it?

First, what is mortgage insurance? Mortgage insurance is insurance that homeowners pay for, and the bank is the beneficiary to the insurance coverage. It protects the bank against losses they would incur in the event of default or foreclosure on the mortgage they make.

When is mortgage insurance required? On conventional loans, mortgage companies typically require mortgage insurance whenever there’s less than 20% down. On FHA loans mortgage insurance is required regardless of down payment.

Why do banks require mortgage insurance? To answer that question we have to go back and look at what banks required prior to mortgage insurance. Banks required that everybody have 20% down and the idea was in the event of a foreclosure the bank would have incurred losses and that means they would have missed out on mortgage payments for somewhere between six and 18 months, meaning missed interest income.

If a person can’t afford to make their mortgage payments chances are they can’t afford to maintain the property so once they get the house back via the foreclosure process there’s deferred maintenance the bank has to pay for. The bank would have had to hire an attorney to execute the foreclosure process and then hire a realtor and pay a commission in order to sell the house. The banks require 20% down as their cushion to ensure that if they had to go through that foreclosure process they can still get their loan proceeds back.

Now there are a variety of ways to pay for mortgage insurance but without 20% down banks are going to require it.

If you’re curious about the different mortgage insurance options available to you and want to learn about them I’d love to be your resource for you. Please contact me today. Thank you.

Your Guide to Understanding Mortgage Insurance

When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we’re able to provide “combination loans” which are fairly uncommon these days).

Mortgage Insurance (also known as “mi” or “pmi‘) is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.

There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:

Borrower-paid mortgage insurance (BPMI)– This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can often request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.  However, it’s important to note that the only legal requirement the lender has to eliminate the mortgage insurance is under the Homebuyers Protection Act which states that the lender is not required to eliminate the mortgage insurance until the loan balance is scheduled to reach 80% of the original purchase price based on the original amortization schedule.

Lender-paid mortgage insurance (LPMI or “No mi”)– With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. The drawback of LPMI is that the increase a borrower accepts to their interest rate is permanent so even when they have achieved 20% equity in their home their rate will remained at the higher level.

One-time or “upfront” mortgage insurance– With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has enough money to cover the additional settlement charges (but not enough to put 20% down).

Split mortgage insurance– Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or “one-time” mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.