Category: Priority Lending Blog

What Is Home Loan Insurance?

TLDR: Home loan insurance (or mortgage insurance) is protection for your lender. In the event that you fail to pay one of your mortgage payments. Mortgage insurance does not benefit you. But, you pay for it based on the amount of money you put on your loan as a down payment. You can find out an estimate of how much you’ll pay for home loan insurance. All you need to do is look at your credit history and other factors.

When most people think about insurance, it’s to protect a piece of property or valuable item that they own. There is another form of insurance available which you may not know about. That insurance is mortgage insurance. Mortgage insurance does not provide any direct protection for you or your property. Mortgage insurance protects the lender from homeowners who may default on their payments.

While home loan insurance doesn’t benefit you, you will likely be the one who pays for it. We are going to help you gain a better understanding of exactly what mortgage insurance is. We’re going to give you a detailed explanation of exactly what it is and how it works.

Continue reading below so that you can learn more about what mortgage insurance is and how it impacts you.

Exactly what is home loan insurance?

Home loan insurance is also commonly referred to as mortgage insurance. Home loan insurance pays your lender a percentage of the principal amount in the case that you fail to make one of your payments on time. There are two main types of mortgage insurance that exists and the type of home loan that you take out will determine the category of insurance that your lender takes out against your mortgage terms.

Here are the two main types of home loan insurance:

  • MIP- MIP stands for the portage insurance premium and this is the type of mortgage insurance taken out on homes that use FHA government-backed loans. FHA loans require an upfront mortgage premium to be taken out once the loan is approved in addition to an annual premium.
  • PMI- for private mortgages, PMI insurance is usually required if your down payment is less than 20%. This insurance type if calculated into your monthly mortgage payments

These are the two main types of mortgage insurance that you’ll encounter when applying for a home loan. If you’re unsure about the type of mortgage insurance that you’re paying for, take the time to look over the details of your mortgage terms to find out. Neither of these mortgage insurances provides more benefits than the other, they are designed to benefit your lender so the only “benefit” you can expect is paying less than other homeowners.

Factors such as your credit score, your mortgage loan amount, and more will factor into how much you pay for mortgage insurance.

How Home Loan Insurance Benefits You and the Lender

As stated before, home loan insurance does not provide any direct benefits to you as a homeowner. Instead, the mortgage insurance directly protects your lender who will be responsible for paying the principal of your loan in the event that you fail to pay. In a sense, mortgage insurance cushions the blow that your lender takes in the event of a failure to pay so they can save money and protect their collateral.

The more of a risk you are for the lender, the more you’ll pay for mortgage insurance. That’s why you need to take the time and look over all of the loan options available to you before signing a particular agreement.

Here are some of the key factors that will determine how much you pay for home loan insurance:

  • Credit score
  • Whether you have an adjustable or fixed interest rate
  • The premium plan that you choose
  • Risk factors
  • Loan-to-value ratio or your down payment
  • Whether you have a refundable premium or not
  • Loan term or length
  • Percent of mortgage insurance coverage required by your lender

You can use all of these variables to decide on how much you will pay for insurance on an individual basis. Once you take all of these factors into consideration prior to applying for a home loan, you can minimize the amount of money you pay out of pocket each month for coverage.

People Also Ask

What is the benefit of mortgage insurance?

Mortgage insurance directly benefits and protects the lender of the mortgage from having to pay the full principal amount when a buyer fails to pay

How long do you pay mortgage insurance?

The amount of time that you pay for mortgage insurance depends on how much money you put down on the loan initially

How much is PMI monthly?

PMI is calculated with a 0.5%-1% rate to determine the monthly amount, which equals to about $90 a month on a $100,000 mortgage.
See more information about “What is home loan insurance?“.
Additionally, you may want to see our “mortgage checklist

 

Do I Qualify for a Home Loan?

Do I Qualify for a Home Loan?. You can check if you qualify for a home loan by looking at your past credit history and current credit score.TLDR: Preapproval and prequalification for a home loan are two separate things, prequalification simply means that lenders are assessing whether or not you should waste your time applying. Preapproval of a home loan means that your loan terms have already been secured and locked in. You can check if you qualify for a home loan by looking at your past credit history and current credit score.

Whether you’re a first-time homebuyer or someone looking to switch from your existing home to a new one, qualifying is the first step that you’ll need to tackle. Every year the requirements to get approved for a home loan change based on economic conditions, tax rates, and more. Before wasting your time applying for home loans that you’ll never get approved for because you don’t meet the qualifications, research, and learn about home mortgage requirements so you’re better equipped to handle the process.

Each mortgage lender uses different rules and factors to determine your worthiness to take out a loan. To help you better answer the question of “How much do I qualify for a home loan?” we’re going to provide you with a detailed guide below.

Make sure you read all of the sections in this article so that you will know exactly what factors lenders are looking at when you submit your home loan application.

How much do I qualify for?

Before you get to the process of applying for a home loan, you will likely go through a process known as prequalification. During the prequalification process, you will be asked to fill out a simple financial statement and provide basic details related to your income such as your salary and credit rating. It’s important that you don’t get the prequalification process confused with preapproval as they are totally separate.

Preapproval means that a particular loan amount is already secured so you as the homeowner knows exactly what you’re getting into. Preapproval only happens when a lender runs a verified credit check on you to determine whether or not you can withstand the responsibility of your new mortgage.

When looking for homes, you’ll quickly realize that credit is one of the most important factors that will determine whether or not you get approved. Take a look below to see some of the other really important factors that determine how much you can qualify for on a mortgage loan.

Home Loan Determination Criteria:

  • Current state and credit usage of any open credit card accounts that you may have
  • Marks on your credit such as late payments, collections, or bankruptcies will all impact your ability to get approved for a home loan
  • Your credit score
  • Any current monthly payments that you’re making will be compared against the total amount you would be paying with the home loan you’re applying for
  • These are the key factors that will be used by lenders to decide on whether or not you should be approved for a home loan. Your debt to income ratio and your current monthly housing costs are two things that you need to pay attention to when trying to secure a home loan.

Approval or Denial of a home loan application

Once your home loan application has been submitted, the lender will take their time to review all aspects of your income, credit, and payment history to decide on whether or not you deserve to be approved. In the event that you are approved for your home loan, the next steps will involve you filling out obligatory paperwork as it relates to the terms of your new loan.

You should ask your realtor to assist you with signing your approved home loan papers to ensure that the terms are exactly what as agreed to prior. If your home loan application happens to be denied, you shouldn’t worry because not all hope is lost.

There are several reasons why your home loan application could be denied. Most lenders will let you know what factors played a key role in the refusal of your loan application. Commonly, credit and payment history are the two biggest factors which impact lenders loan decision. As long as you work to resolve the problem by paying things on time and reducing your total monthly expenses, you should be able to re-apply and get approved in no time.

People Also Ask

How much do you have to make to qualify for a home loan?

You have to make at least 70% more than what your mortgage will be in order to be looked at as favorable to most lenders

When and where to apply for a mortgage?

Most lenders will allow you to meet them to request pre-qualifying documents at any time

How hard is it to get preapproved for a home loan?

The difficulty of getting preapproved for a home loan will all depend on your credit history and payment history as a whole. Some people can get preapproved quite easily while others can’t

Conclusion

All of these tips can be used to assist you in finding the right lender who is willing to sit down and work with you so that you can secure that home loan you’ve always wanted.

Here is the link to our mortgage calculators

What Types of Home Loans Are There?

Buying a new home can be the most exciting purchase you will ever make. Whether it’s your first home as a newlywed couple or the long-awaited dream home where you intend to enjoy retirement, understanding what types of home loans are available, will save you stress in the long run! 

Oftentimes factors such as credit score and income play a large part in what you can afford. Rest assured there is a loan out there for you, regardless of your circumstances! Let’s look at a few of the main types of home loans to help you better understand your options. Know what loans are available to you, and how they work. This will set you up for success in choosing which home loan you can afford. 

FHA Loans

FHA loans will be insured by the Federal Housing Administration. This acts as a back up in the case of nonpayment. This type of loan requires the homeowner to pay for private mortgage insurance. This insurance is paid as an initial premium payment at closing. Additionally, this acts as a monthly insurance payment on top of that. FHA loans are typically used with first time home buyers, due to its low rule of only 3.5 percent down payment. A need to have at least a FICO score of 580 to qualify for the 3.5 percent down. You can still receive an FHA loan with a FICO score below 580, but it will need a much larger 10% down payment. FHA loans generally have:

  • lower closing costs
  • less credit history
  • offer lower interest rates

This makes it a great option for many home-buyers.

Types of home loans

Conventional Fixed Loans

These loans are not backed by a government agency like the FHA. Because they are not guaranteed by the government. They are riskier by lenders and thus have tougher requirements. Conventional loans need at least a 20 percent down payment. But do not need private mortgage insurance. Requirements vary by lender. 620 is the typical smallest score required to qualify for a conventional fixed loan. These loans are available in 10, 15, 20, 30, and 40-year terms, although the most common are 15 and 30- year terms. If you have the means to put down 20 percent on your home loan, do so. Avoid having to pay for private mortgage insurance. You will save on your monthly payment. 

VA Loan

Guaranteed by the U.S. Department of Veterans Affairs. These home loans are available only to veterans of the U.S. armed forces. They are also available for service members, and now and then, their spouses. This type of loan was created by the U.S. government in 1944. The aim was to help to return service members to buy a home without needing a down payment or great credit. As mentioned, these loans need zero down payment. and private mortgage insurance is not required. Generally, VA loans have a more competitive interest rate compared to non-VA loans. Veterans would do well to take advantage of this type of loan when buying their home.

Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages, or variable-rate mortgages. These are loans in which the interest rate can vary over time. This rate is based on the economy and the cost of borrowing money at the time. There are different types of ARMs. One common type of ARM is a 5/1. As an example, with this type of loan, the interest will stay the same for the first 5 years. Then it will become adjustable for the following 25 years. The interest rate will reset every year following the initial 5 years. There are benefits of using an adjustable-rate mortgage. One is that you will receive a low initial interest rate. In general, ARM mortgage rates start out about 0.5 percent lower than fixed-rate loans.

Some homeowners chose to make their payments as if it were at a standard interest rate. Despite having lower monthly payments during the lower interest period. This allows a much larger part of the principal to pay off every month. This gains a large amount of home equity in a short period of time. ARM loans are particularly appealing when conventional interest rates are high. Lenders may set their own credit score standards. The FHA will guarantee loans for borrowers with scores as low as 500. This helps those with low credit scores. The ARM may also be a good option for someone planning to sell or refinance within a few years.

USDA Home Loan

The USDA home loan is a unique loan. The home you buy must be located in the eligible rural or suburban area. This is defined by the USDA, but if your home qualifies, you’re looking at zero down payment and a low-interest rate. These loans are guaranteed by the United States Department of Agriculture (USDA). Because of the USDA guarantee, eligibility requirements are lenient. Provided your home is in a qualifying location. The USDA’s definition of “rural” has expanded more recently. This includes many small towns, suburbs, and outlying areas of major U.S. cities. Mortgage rates are often lower than FHA or conventional loans. The least credit score needed to receive this loan is 640. Perfect if you don’t mind living away from the hustle and bustle of the city. A USDA loan may be the perfect fit for your lending needs. 

Interest Only Loans

Interest only loans allow the borrower to pay only on the interest of their loan for the first 5-10 years. After the initial period of paying interest only, the loan is paid off. It is the same as a conventional loan would be, with principal and interest included monthly. Interest only home loans need a higher credit score, with at least 720. These also need a higher income and down payment. Compare this to several of the loans mentioned before. This type of loan slows down repayment of principal, so equity in the home is not seen until much later on. First time home buyers who can only afford a low mortgage payment may consider this loan. But, be aware that your mortgage will go up a lot after the initial 5-10 years. This type of loan can also be helpful for someone looking to buy a fixer-upper. As long as the intention of selling it right away. This will free up more money to put towards renovating the home. 

Now that you have a better understanding of what types of home loans there are, you can be confident that you will make the right choice. Happy house hunting!
Additional reading on “Types of home loan”
On top of that, you may find our “Motrtgage Rates” page informative.

 

A Valued Partner

No Better Time To Buy

A friend of mine who is far smarter than I am – hold the snide comments – sent me a link to an article that was written about two weeks ago.  I’ll include a link to the article below if you really want to read it:

http://bit.ly/2020REoutlook

This article is one of those that point out the reasons we should all be happy and dancing in the streets relative to how well the real estate market is performing . . . and for those of us who are homeowners, new and veteran, we do have great reason to be happy (although I’d recommend you be careful about dancing in the streets for a whole host of reasons – traffic, public safety, lack of coordination, etc.).

Two of the points the article makes are the economy is strong with little to no signs of slowing down and house values continue to increase at a healthy rate.  And just as your overall sense of warmth and fuzziness is about to envelop your whole self like a cozy bubble, you near the end of the article when you read a line that pops that bubble by mentioning that there’s an influx of buyers looking to flood an already constrained market.  Why would that be a bubble popper?

While the market is ready to welcome more buyers to the market as the Millennials age into and is prepared for it, there’s no mention in this article (or a whole host of others) that there’s an increase in inventory in the foreseeable future.  Translation: there’s still only X number of homes to sell and buy in 2020, so what are we as agents and mortgage professionals doing to get a portion of that market?

This year, we’ll see smarter, more savvy buyers who will be ready to “battle” for that limited inventory, and that will help weed out the agents and lenders who aren’t smart and savvy, for sure.  However, if that’s your only plan – outlasting a battle of attrition – to grab market share in 2020, that attrition will get you, too.

We don’t need to be shouting from our electronic soapboxes on social media that there’s no better time to buy than now or any other OBVIOUS truths – today’s potential homebuyer already knows that and will probably tune us out if that’s all we have to preach.  We need to go on the offensive and show the potential homebuyers WHY we’re the person they should hire to guide them through possibly the biggest transaction of their lives up to this point.

Over the last six months, I’ve met with a lot of great realtors who have shared marketing ideas with me that, I believe, are very smart and attractive.  They’re getting far more than the family-and-friends referral – the same referral that got so many into the business in the first place because “it was easy” – and they’re taking no prisoners.

What’s your game plan to increase your market share in a limited-opportunity market?  Is this regarded as no better time to buy? Besides providing loan products to close those transactions others can’t or won’t, our value is in helping you fine-tune and execute that plan.  If your lender ISN’T helping with that, there’s no value.

Links to other relevant mortgage articles

Fix And Flip Loans Explained

Being a real estate investor (or a real estate agent working with one) is not for everyone, that’s for sure.  There is a reason people don’t dive into the real estate investing pool. They don’t understand how the deals are being financed.  Let me give you a quick breakdown of how some fix-and-flip deals are being financed.

6 important steps.

  1. You take the acquisition price – for example, $200,000; you’ll need to put down 10% – in this example: $20,000.
  2.  Determine how much will be needed in repair costs to get the home ready for appraisal and sale – for example, $35,000.
  3. The acquisition price was $200,000 with $20,000 down. So $180,000 for the home acquisition and $35,000 for the repairs.  Added together, that’s $215,000 needed from a lender.
  4. Determine the home’s After Repair Value (ARV) – example: $375,000.  The lender will lend up to 65% of the ARV – example: $375,000 X 65% = $243,750.  Because 65% of the ARV is higher than $215,000 (the acquisition and repair costs), all’s well.
  5. The “flipper” (borrower) needs to put together a precise list. Exactly what improvements required for the home calling out specific materials.  An appraiser will determine the current state of the home. Then compare it to the repair schedule to determine what the ARV will be.  If it comes back higher than thought, great.  If it comes back lower, it may need the buyer to bring more money to the table. Example: the home’s ARV is set at $320,000. 65% of that is $208,000, and $215,000 is a rule. The borrower would have to come up with an extra $7,000 over and above the $10,000 they brought in for the down payment.
  6. Establish ARV. The lender then moves forward with finalizing the loan and financing the project.  The terms will usually be 12 months with interest only charged.  Example: on a $215,000 loan at 9.5% interest only, that would be a monthly payment of $1702.08.  The lender is going to charge fees upfront that usually add up to about 4-5% of the loan amount.  That amount paid at closing along with any closing costs (about 2.5% of the loan amount).

So, let’s put this in real numbers and see how much a flipper would make:

$20,000 for the down payment

$15,050 for fees and closing costs (about 7% of the loan amount)

$20,425 (12 months of interest)

$55,475 TOTAL COSTS

 

$375,000 house sells for this amount

$215,000 amount financed

$160,000 TOTAL CLEARED FROM SALE

 

$160,000 total cleared from the sale

-$ 55,475 in total costs

$104,525 PROFIT

That number north of $100K isn’t the TRUE profit. Because you have short-term capital gains taxes to consider. But this gives you a general idea of how such a fix-and-flip project can get financed. Plus how all the numbers get calculated.
 

This is one of many different ways to finance a fix-and-flip. 

We also have other strategies that appeal to a “flipper” mentality. This allows the flipper to avoid those short-term capital gains taxes.  This is for those who are leaning more toward the buy-and-hold strategy. We have ways to help them get properties without the need for income verification.
 
As an agent, by having a passing knowledge of what your lending partner can do to help finance these types of deals. You become an asset to your existing customers who are in the investor pool. Those who are at the edge unsure of whether they should dip their toe in the water to see how it feels.  Give them a splash of your insights, and you’ll be surprised at who jumps in!

Here is a good article on “How to get a loan to flip a house”.

Additionally, have a look at our “Mortgage Terms”.