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I’m going to start by giving my readers a brief 101 on PMI – Private Mortgage Insurance. It’s been some time since I’ve been able to post some new information. While others in my industry are struggling to stay afloat, I’ve been hard at work closing loans in the face of tough mortgage conditions. One of the biggest issues I’ve been running into lately is the availability of PMI.
Most loans today are done through Fannie Mae, Freddie Mac or FHA. ( I’ll explain why in another blog )
These institutions require that the borrower of the loan take out an insurance policy against loan default, anytime the borrower is financing more than 80% of the homes value. In the case of FHA, they will require PMI regardless of your equity position. I will tailor this information more towards Fannie and Freddie where most of the great loans are being done today. The lenders believe that if they have to foreclose on you they will probably only recoup 80% of the home’s value through a foreclosure sale. This is why insurance comes into play.
When you finance more than 80%, you will be required to pay for an insurance policy that INSURES the LENDER in the case you default on the loan. If you default, the lender makes a claim with the PMI company and can recoup some of their losses.
In the past, there were a wide variety of PMI companies issuing insurance on all types of mortgages, i.e. investment properties, no income verified loans, co-ops, condo’s etc, etc. Wait, not anymore!
Just like all the big lending institutions tightening their lending guidelines, so have the PMI companies. Now, many times I am able to get a person approved for a loan through various mortgage companies but am unable to acquire them a PMI insurance policy that the lender requires to complete the loan. There are many PMI companies out there and they do differ from company to company, however it seems that the PMI companies have become the last word in lending. It matters not if the bank wants to do the loan, if you can’t obtain PMI.
One of the easiest ways to get around PMI is through the use of combo loans. In example, if you want to borrow 90% on a purchase, you can break the mortgage into 2 loans. The first loan would be for 80%( NO PMI needed) and we would also get a second mortgage for 10% of the purchase price. You are still able to finance 90% of the deal, but it is broken up into 2 loans. Generally, the interest rate on the piggyback second mortgage is slightly higher but often it is cheaper than paying for the PMI. The best part is there is no need for PMI underwriting and PMI. If the the lenders are willing to do the 2 loans we don’t need to get a yes from anyone else.
The only problem to that solution is 2nd mortgages can now be tough to obtain. Not all lenders are doing them and not all lenders are doing them well. Here is where a good broker should be up on their products and be in constant search for new ones. I’ve just recently signed up with a large national lender who is one of the few still doing combo loans. This has allowed me to offer loans to clients turned down by PMI companies for PMI insurance where other lenders have given up on them because they don’t have the product or PMI eligibility.
PMI, which used to be a sure shot has changed our game. Loans are now being underwritten twice, with PMI companies having the final say. It doesn’t mean we have to stop doing loans because PMI’s are unwilling to write policies, it just means we have to be a little more diligent in our qualification processes and make sure we are up on the latest products!