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PMI

Posted by  on Apr 16, 2009
 
Private mortgage insurance (PMI) is insurance that protects a lender or investor against loss if a borrower stops making mortgage payments. It makes it possible to buy a house with as little as a three to five percent down payment, helping you buy a home sooner than you otherwise could. Studies show that homeowners with less than twenty percent invested in a home are more likely to default, making low down payment mortgages more risky for lenders and investors. That is why lenders and investors generally require mortgage insurance for loans with down payments of less than twenty percent.

Premium prices are based on the size of the down payment, type of mortgage and amount of insurance coverage. Premiums typically are folded into your monthly mortgage payment. You can pay the premium up front and finance it as part of your mortgage. Lender-paid policies also are available, but they result in a higher interest rate on the mortgage. The qualifying process for loans covered by mortgage insurance is similar to that for regular mortgage loans. Generally, you need to have enough income to cover the monthly mortgage payment and closing costs, and a good credit background.

PMI makes it possible for you to buy a house with a low down payment and get into home years sooner than you would otherwise. If you are a first-time buyer, PMI helps you get over the biggest hurdle to home ownership: coming up with the traditional 20 percent down payment. If you are a trade-up buyer, mortgage insurance allows you to consider a wider range of homes. Both first-time and move-up buyers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies.

If you are a lower-income, first-time buyer, you may be eligible for special programs that make it possible for you to buy a home with 3 percent or less down. Their flexibility makes it possible for many lower-income buyers to achieve home ownership: Programs are tailored to community needs and involve partnerships with local groups. They feature education programs that help you learn about the home buying process and counseling to help you keep your home if you run into financial trouble. They offer a variety of options in such areas as down payment, PMI premium and credit verification. Evidence of on-time rent and utility payments, for example, can substitute for a more traditional credit history. Check with your lender to see if you are qualified for an affordable housing program.

In addition, you can get cash to pay off consumer debt, make other investments, or cover college tuition or medical bills. A range of PMI products with a variety of payment options is available to meet your needs. When you shop for a loan, ask lenders about your PMI options. Lenders make the arrangements for PMI coverage on loans. They often send a mortgage application to more than one insurance company. One company may approve an application, while another may not. If a company denies coverage on a loan, it sends a letter to the borrower explaining why. The lender, meanwhile, may have obtained coverage on the loan from another company.

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