First Time Homebuyers Choosing Private Mortgage Insurance

Private Mortgage Insurance (PMI) is an Alternative to FHA Loans

Are you considering purchasing a home, but don’t have a lot of money for a down payment?

Very few households have sufficient cash to purchase a home mortgage. Most households will need a mortgage, and most first-time homebuyers will need a low-down payment purchase mortgage.

According to a recent Genworth Homebuyer Report, published in February 2018, the First Time Homebuyer Market is on the rise. They note that the

First-time homebuyers have always relied on mortgage products with lower down payments…(In Q4 2017) When buying a home, 79 percent of first-time homebuyers used a low down payment mortgage, while 21 percent used a high down payment mortgage...

In order to qualify for a purchase mortgage, you are going to need sufficient credit, income, and money for a down payment. Fortunately, there are various low down payment programs. The most popular programs are government-backed loans such as FHA, VA, or USDA mortgage loans. The FHA loan is a popular option for borrowers with lower credit scores and looking for a low-down payment (or high Loan to value).

In addition to FHA loan, low down payment Conventional loan products are also available. Conventional loans require Private Mortgage Insurance (PMI) if your down payment is less than 20%, and generally require a down payment of at least 5%. However, in the last few years, both Fannie Mae and Freddie Mac offered low down payment programs, allowing qualified home buyers to purchase a home with only 3% down.

FHA Loan: A Popular Purchase Mortgage Option

With rising prices and rising mortgage rates, purchasing a home can be a difficult first step. Starting with the demise of the mortgage market after the Housing Crash of 2007-2008, the mortgage market volume significantly dropped. At the same time, the FHA Market Share increased.

Since 2012, the mortgage market volume has steadily increased. With rising mortgage rates, mortgage lenders are concentrating efforts on the purchase market, instead of the refinance market. According to the HUD data, the purchase market for Q3 2017 was almost 70% of the total mortgage market. FHA loans constituted 15.5% of all purchase loans.

Source of HUD information: U.S. Department of HUD as of December 10, 2017. Originations based on beginning amortization dates. b Includes all conventional and government single family forward originations. Mortgage Bankers Association of America, “MBA Mortgage Finance Forecast,” October 2017, and CoreLogic TrueStandings ® as of December 10, 2017.

The Growth of the Private Mortgage Insurance Market

One popular low down payment option for the first time homebuyers (FTHB) is a conventional loan combined with Private Mortgage Insurance (PMI). According to the Genworth report:

FHA remains the top mortgage product for FTHBs in Q4, but private MI is the fastest-growing and will likely become the top product soon.

One of the reasons for the growth in PMI is due to conventional 97% LTV programs. Fannie Mae offers both, Fannie Mae Standard 97% LTV and the Home Ready 97% LTV. The Home Ready loan offers lower fees but has area and/or income limitations. Freddie Mac offers the Home Possible 97% LTV loan. According to their factsheet:

With Home Possible, you’ll capitalize on opportunities to meet the home financing needs of low- and moderate-income borrowers looking for low down payments and flexible sources of funds.

The Growth of PMI vs FHA: Shopping for a Mortgage

When comparing an FHA loan versus a 97% conventional loan consider:

• Can you qualify for the loan?
• How much will you pay?

FHA loans come with standard fees, including an upfront fee currently at 1.75%. The monthly mortgage insurance premium (MIP) as of February 2018 is 0.85% (declining payments) for loans over 95% LTV. Although the Obama administration scheduled a reduction in FHA fees, this was frozen by the Trump administration. FHA minimum credit score is 580, although many lenders have stricter credit score requirements. https://www.hud.gov/sites/documents/17-07ML.PDF

Conventional loans generally have a minimum credit score of 620, although lenders often require higher scores. The 97% conventional loans do not have an upfront fee. The monthly premium varies depending on several factors, including Credit Score. For example, the Fannie Mae 97% LTV is cheaper for those with a FICO score over 680. Another factor to consider is the cancellation of the policy. Mortgage insurance on a low-down payment FHA loan remains for the duration of the loan. https://www.hud.gov/sites/documents/17-07ML.PDF. On the other hand, PMI automatically cancels when your original LTV reaches 78% (assuming you are current on your loan).

When looking for a purchase mortgage there are a number of options. Shop around and find the loan that best fits your financial situation.