There is a one sure way to avoid paying for private mortgage insurance when buying a house – putting at least 20% down. But what if you can’t?
Let’s start form the basics and work our way to answering this question.
What is Private Mortgage Insurance (PMI)?
PMI is designed to protect lender in case you become unable to make your mortgage payments. It exists because, typically, if the borrower defaults the home is sold at auction, which means it can sell at least 20% less than its true value due to damage or neglect. Thus, PMI offsets the risk of borrower defaulting.
PMI is offered by privet insurance companies, hence the name, as oppose to government issued insurance which covers FHA loans. Furthermore, PMI will end once the homeowner’s equity reaches 20% of loan amount. In comparison, the FHA MIP can only be cancelled if the property is refinanced.
How much does it cost?
PMI, same as any other insurance, is based on your particular risk to the bank. In other words, the lower your down payment, the higher your PMI costs. Typically, annual prices for PMI vary from 0.3% to 1.15% of your loan amount. Your exact rate is calculated depending on your credit score, equity and loan term.
When and how can you cancel PMI?
In general, you can cancel your PMI once the principal balance of your loan drops to 80% of original appraisal, or current market value. However, a few restrictions may apply depending on your provider, for example, showing history of timely payments or absence of second mortgage.
How can you avoid PMI other than making 20% down payment?
If you do not have a 20% down payment and not an eligible military borrower, who can apply for VA loan, you can still avoid PMI.
Most of the lenders offer Lender-Paid PMI, which is basically same thing except the lender pays it on your behalf. In this case, you will be requested to accept a 0.75% rate increase. However, we strongly encourage you to discuss this option with your lender, because LPMI could not be cancelled like PMI can.
There is another option you may consider in order to avoid PMI. The, so called, “piggyback” financing. This option, however, will require a 10% down payment. Simply put, the piggyback financing is when you take two mortgages. The first mortgage is a loan on your home and the second to cover additional 10% for the down payment. Such structure is often referred to as 80/10/10, in which 80% is your home loan, 10% second mortgage and 10% down payment.
So, to conclude and answer our original question, yes, there are ways to avoid PMI. However, we recommend not to make this decision on your own but rather consult with your broker.
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Regardless of whether you are applying for a new mortgage or refinancing you existing Los Angeles home, the lender wants to be sure that you can afford it. In order to determine that the lender will evaluate your debt to income ration, or DTI.
A high debt to income ratio could make getting approved for a new loan quite a challenge. However, there is a way to manage the situation and make the numbers work. Remember, lenders value low DTI, not high income.
First, let’s clarify what is DTI and how it is calculated.
What would be considered as debt in calculating DTI?
DTI compares your total monthly debt, consisted of above mentioned, to your income before taxes. Let’s put in the numbers to illustrate. Say, your monthly income is $10,000 before taxes. Your current debt consists of mortgage, property taxes and insurance, which comes to about $2,000. Of course, you have a car, which is, for the sake of example, costs you about $500 a month. Let’s also assume, you have credit card payments or maybe a student loan, which in sum comes up to about $500. Which brings us to total of $3,000 of debt payments. Now, let’s plug it in the formula:
DTI = Monthly debt payment/ Gross monthly income = $3,000/$10,000 = 30%
Thus, your debt to income ratio is 30%.
What if you have a high DTI?
The above example shows desirable DTI, however, a higher DTI is acceptable. In fact, lenders might consider a 44% DTI, assuming a perfect credit record and other variables. But what if your DTI is higher than 44%?
Luckily, you still have options. Here is what you can do: