Like most industries, we love acronyms in the mortgage world. LTV is the loan amount divided into the value, where value is determined as the lesser of the appraisal or, if you’re buying, the purchase price. This is the point at which I start most conversations with borrowers because the amount (or percentage) of a borrower’s down payment will often dictate the mortgage product utilized.
So you’ve heard about PMI, right? As you probably know, this is Private Mortgage Insurance, a requirement that exists when the LTV is above 80%. In actuality, Private Mortgage Insurance only exists for non–FHA (Federal Housing Administration) type loans, most often referred to as Conventional loans.
The nuance here is, though mortgage insurance exists for FHA, it’s not private. FHA loans are insured by the government. And for the first time in its 78 year history, we may be looking at an FHA bailout due to loan defaults. In fact, FHA mortgage insurance premiums – which are paid both up front AND as part of a monthly payment – have climbed over the past few years because of these defaults and resulting losses. FHA loans are now more costly than ever – both at closing and on a monthly basis.
Great Midwest utilizes a couple of sources for fixed-rate Conventional loans, including Fannie Mae (FNMA). When PMI is necessary, we employ a third party – one of a handful of national mortgage insurers – that insures us from loss should a borrower default. Premiums paid on the loan (either up front as a single premium OR, more commonly, monthly – but not both) are sent by the lender directly to the private insurer until the LTV typically reaches 80%, at which time the borrower can request release. Lenders typically release it at 78% LTV. PMI on Conventional Loans is often less expensive than FHA loans, especially for borrowers with excellent credit and a solid financial footing.
Last, mortgage insurance in any form may be tax deductible. Consult your tax advisor for more information, as you don’t want to get in trouble with the IRS. Sorry, couldn’t resist one more acronym!
Posted by Jon Reetz NMLS ID #296610