My client looked at me with an exacerbated expression that let me know I had some explaining to do.. “So wait, that’s not my homeowner’s insurance or PMI? Well, what is it then”?!? I get it. With all of the different programs and various fees and insurance involved in a mortgage transaction, most consumers have no idea what to expect in their loan until they see the first Loan Estimate (LE). Let’s take a bite-sized peek behind the curtain to paint a clear picture for those of you playing at home.
In addition to the monthly escrow payments for property taxes and your home owner’s insurance, all mortgage loans with less than a 20% down payment have a fee paid to the agency issuing the mortgage (FHA, VA, FNMA, FHLMC, USDA) to insure a portion of the loan in the event of default. These fees include monthly insurance premiums as well as Upfront Mortgage Insurance Premiums and funding fees depending on what program you are using. A brief breakdown based on program type follows.
FHA and USDA Government loans have both an initial upfront insurance premium and monthly insurance premiums based on your loan amount . FHA loans charge UFMIP at a rate of 1.75% of your loan amount and a monthly premium of .85% of the loan amount. USDA charges 1% of the loan amount upfront and monthly premiums equal to .35% of your loan amount. While the upfront fee and monthly premiums make these loans a bit more expensive, they do accept higher risk in the form of lower down payments and more relaxed qualification requirements.
A VA loan is a different animal all together and deserves it’s very own paragraph! VA loans do not have any monthly mortgage insurance. The fees paid to insure a VA loan are charged upfront as a Funding Fee and vary depending on your status with the VA. The chart below breaks this down based on whether or not you have had a VA loan before and how much you choose to put down on your purchase. *** IF YOU ARE A DISABLED VETERAN THE FUNDING FEE IS WAIVED.
Conventional loans are pretty straight forward. There are no upfront premiums on conventional loans and private mortgage insurance (PMI) can be purchased on the open market. This is great for clients with high credit scores and low debt-to-income ratios because the monthly payments can be much less than the Government issued insurance. Beware, loans with credit scores below 700 and with riskier features can cause PMI to get expensive quickly to the point of being cost prohibitive!
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