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Best Mortgage Rates and Mortgage Insurance Unavailable in Some Areas

Posted by  on Oct 21, 2009
 

In the past, an approval from a Fannie Mae or Freddie Mac automated underwriting system (AUS) was worth the paper it was printed on. Once you had that approval, all you had to do was meet its conditions--for example, provide pay stubs to support the income on your application--and you could close on your mortgage. Buying mortgage insurance (MI) was just one of those conditions, not a big deal.

Mortgage Insurance Approval not Automatic
Today, your AUS approval might be good for little more than lining a bird cage. If you want to buy a property with less than 20% down or refinance with less than 20% equity, you are required to obtain mortgage insurance. Approval for mortgage insurance used to be a formality: if you were good enough for Fannie or Freddie, you were good enough for an MI company. That has changed.

MI Companies Making Up for Past Mistakes
Mortgage insurers provide coverage that protects lenders when borrowers default on loans. If you put down 5% when you buy your home, Freddie Mac requires you to buy insurance covering an additional 30% of the purchase price. Recently, mortgage insurance companies paid record amounts to lenders as borrowers defaulted in huge numbers. Their toxic portfolios need to be cleaned up, and they are doing it by rejecting all but the most pristine borrowers. In many cases, you can't get MI if your credit score is lower than 700.

Location Matters for Mortgage Insurance Coverage
MI companies are not just looking at you; they are looking at your property too. If it is in a distressed or declining area, you have a harder time getting approved for MI. For example, the Mortgage Guarantee Insurance Corporation (MGIC), a large provider of mortgage insurance, imposes even more restrictive guidelines in areas it defines as, well, "restricted."

In places like California, Nevada, and Arizona, you can't buy a condominium with less than 15% down. In Florida, you can't buy a condo with less than 20% down--there is no mortgage insurance for you. Refinancing is only allowed up to 85% of a condo's value and limited to properties already covered by MGIC insurance--no new customers accepted. Oh, and you need a credit score of at least 760.

Even if you are in a non-restricted area, you aren't in the clear. According to MGIC's latest update, "properties in Non-Restricted Markets, but identified by the appraiser, lender, or investor as being in a neighborhood with declining values, must follow Tier One Restricted Market parameters."

Mortgage Insurers Using Their Own Judgement
Mortgage insurers no longer trust the judgment of Freddie Mac and Fannie Mae. MGIC states that it "does not automatically approve loans for mortgage insurance based on decisions obtained from Agency AU systems. AUS-approved loans that exceed MGIC's guidelines must be manually underwritten by MGIC."

Buying a Home? Go All the Way or Go FHA
If you are trying to buy a new home and are not a candidate for fiscal sainthood, you probably have to come up with the whole 20% down. If you don't have 20% down, and there isn't a halo floating over your credit report, try FHA-backed loans. Yes, you still have mortgage insurance in the form of an upfront mortgage insurance premium (MIP) and monthly charges as well. But with housing prices and interest rates as low as they are, it is probably worth sucking it up and getting into your next home now.

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