What Is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is a requirement for mortgages with interest rates that exceed the current market rate. It was made to protect lenders and homeowners against mortgage default. There are many eligible fees associated with private mortgage insurance, including up-front charges, annual fees, and premium add-ons.
Overall PMI adds additional costs to new home borrowers without as much protection as it originally offered for lenders and homeowners. The cost of private mortgage insurance can be prohibitive, especially for a new homeowner.
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is an insurance policy on a pool of mortgages that helps protect the mortgage lender against losses that may occur if a borrower defaults on their mortgage. A PMI protects the lender by providing funds to repay any remaining unpaid amount on a loan in case the borrower defaults. In this way, it acts as an economic safeguard against future foreclosure risks.
PMI for a specific loan is typically effective for no more than three years. It can be renewed every year, but the insurance is not due to be paid unless the outstanding balance of the loan fell below 65% of the home's value by the time of renewal.
While mortgage lenders may want their loans insured against default, homeowners would like to avoid paying a premium when they are current on their payments. Therefore, many homeowners choose not to buy PMI, and most lenders will allow them to get rid of it.
While the Home Affordable Modification Program (HAMP) was designed to reduce foreclosures, it included a hardship option for homeowners who found paying their monthly payments too difficult. When a homeowner takes advantage of this hardship option, they do not have to provide any documentation that shows they can afford their mortgage payments upfront. Instead, the lender will make an initial "good faith estimate" of how much the homeowner is likely to owe in future payments over the life of the loan. The lender then agrees on a modification plan with these terms and conditions that are agreed upon by both parties. The loan gets reduced or eliminated and homeowners end up paying less than they currently would have been required to pay with PMI.
Homeowners or prospective homeowners who can provide proof of the following are usually able to waive PMI:
1. Ownership of a primary residence, which is a property purchased for one's own occupancy.
2. Good credit standing and sufficient income that will make the monthly payments. If the homeowner has had some late mortgage payments in the past, they may also be required to pay private mortgage insurance for three years. They would still need to prove that they have enough income to cover future installments and repay the entire loan if it were due tomorrow, as well as satisfy some basic requirements with their credit score. Additionally, there are certain other requirements that vary based on each lender.
If a homeowner defaults on their mortgage, the lender can get the house back through judicial foreclosure. This means that the homeowner must repay all the remaining money owed on the loan and then additionally pay off any penalties and fees as well.
The following is a summary of who pays for private mortgage insurance:
• Lenders are required to make payments to PMI underwriting authorities, such as Fannie Mae (FNM) or Freddie Mac (FM). HUD HOEPA limits what amount each of these agencies can charge for PMI borrowers with mortgages in first lien position. This is also known as "first lien", "prime" or "original".
• Borrowers are responsible for paying their own PMI.
• Homeowners have three years to repay their loans, or until the remaining principal balance reaches 80% loan-to-value ratio (LTV) of the home. At that time, they may be eligible for insurance forgiveness if they meet certain guidelines and requirements.
PMI is also required when:
In Canada, Mortgage default insurance is similar to Private mortgage insurance in the US but it is generally paid into by the borrower and not by the lender. In Canada, a subprime mortgage is one that has been given to an individual with less than a good credit rating.
The types of insurance policies available are:
Homeowners must have a very good credit history and must have enough money saved to pay for their mortgage on time. The agency also determines how much homeowners will pay each month in order to cover the mortgage payments, home maintenance, property taxes, utilities and other costs. If any expenses come up that the borrower cannot pay for or the person defaults on their payments they can lose the house. This usually happens when a person has unpaid water bills or only partially pays the property taxes in order to keep up with their monthly payments.
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https://www.realtor.com/advice/buyers-guide/mike_anderson_qa_041617#1524963
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http://www.nytimes.com/2016/03/18/business/-confidential-settlement-between-state-and-banks–leaves-key-parts-unclear-
Conclusion
The recent economic crisis has had a dramatic effect on the mortgage market. The dramatic increase in foreclosure rates has led to an increase in delinquency rates, and subsequently, a significant number of bad loans. The financial system has evolved to include private mortgage insurance to protect lenders from these losses resulting from borrower defaults. PMI is a critical part of the residential lending process and will continue to play an important role in financing homeownership for Americans. This is due to the fact that most lenders only issue loans if they have private mortgage insurance attached.
Official PMI site: http://www.pmi-info.org/index2.html
https://www.hbci...