Maybe PMI Isn’t “Bad,” After All
Many new home buyers avoid mortgage insurance at any cost.
Some delay home buying because of it, but that could be a mistake.
Home prices are rising six percent per year, according to the National Association of REALTORS®. Wait to save a high downpayment, and you could be chasing home prices for a long time.
Mortgage insurance lets you buy at today’s prices and low mortgage rates. It eliminates risk of both skyrocketing in the future.
But that’s not the only benefit of private mortgage insurance (PMI).
In addition, PMI companies often offer valuable services most homebuyers don’t know about — partial claim advances and job loss insurance coverage.
Those “silent” benefits might prove very useful in your life as a homeowner.
The Partial Claim Advance: When You Can’t Pay Your Mortgage
Lenders typically require a 20 percent down payment to remove the PMI requirement.
There’s a simple reason. If mortgage payments are not received, the lender must sell the property to recoup costs. Credit rating agency Standard and Poor’s (S&P) estimates that a lender receives about 20 percent less selling a foreclosed home than would in a regular sale.
The legal fees, real estate commissions, property taxes and maintenance typically come to an additional ten percent of the loan balance. Here’s how that shakes out on a $300,000 home purchase with five percent down:
- Gross foreclosure sale proceeds: $240,000
- Principal balance: $285,000
- Foreclosure costs: $28,500
- Loss: $73,500
That’s a potential loss of $73,500 for the mortgage insurer. The mortgage lender gets its money back, so it won’t hesitate to pursue foreclosure.
The PMI company, however, is on the hook for $73,500. At all costs, the PMI provider wants to prevent foreclosure.
If, for example, it can cover your missed payments and stop your foreclosure for $7,000, the insurer minimizes its losses – helping you while it helps itself.
Requesting A Partial Claim Advance
You don’t get to deal directly with the mortgage insurer. Your lender can request a partial claim advance on your behalf, and must suspend any collection / foreclosure efforts while the mortgage insurer is evaluating the request.
Not all requests are approved – partial claim advances are granted only under certain conditions.
- The missed payments were due to circumstances beyond the borrower’s control.
- The borrower’s inability to pay the mortgage must be temporary.
- The borrower must live in the property.
- Title must be vested in the borrower’s name.
A partial claim advance typically requires that the borrower repay the insurer over time. The advance is interest-free, and repayment is set at a level the borrower can afford.
Some PMI Providers Offer Job Loss Protection
Some PMI providers have begun including job loss insurance in their coverage. Radian Guaranty was the first insurer to do this. They protect against loss of a job for the first two years of mortgages surpassing 95 percent of the property value.
This PMI covers mortgage payments up to $1,500 per month with a maximum benefit of $9,000.
Your coverage depends on the circumstances surrounding your job loss. Typically, you’re not covered under the following circumstances.
- You quit your job
- Your contract expired
- You were fired for cause
- Medical problems kept you from working
- Family issues or pregnancy made you decide to stop working
- You have a normal, seasonal break in employment
Job loss protects you in the event that your source of income dries up after buying a home. While not a common occurrence, it does happen.
You might as well select a mortgage insurance company that offers an extra layer of protection.
Shop Around For PMI
Lenders typically select your mortgage insurance for you.
They often work with two to four PMI companies. Each lender has its own policy for selecting PMI providers; some select at random. Sometimes, only one company will provide PMI based on your downpayment, credit score, or loan type.
However, as the consumer, you can request that your lender select a specific PMI provider.
If job loss mortgage insurance is important to you, make sure that your lender works with a mortgage insurer that offers this protection.
FHA and USDA mortgage insurance is provided by government agencies, not private companies. You can’t select different mortgage insurance when using these government-backed programs.
But conventional loan borrowers can and should research private mortgage insurance providers for the benefits that suit their needs.
As a future PMI-paying homeowner, you could have advantages over someone who makes a 20% downpayment. Maybe the expense of PMI isn’t as bad as everyone said it was.
What Are Today’s Rates?
Whether you opt for PMI or not, today’s mortgage rates are ultra-low. Now is the perfect time to get pre-approved. Home affordability is largely based on low rates.
If rates rise, homeownership will be out of reach for many.
Get a rate quote today. It takes only minutes to get started, and all quotes come with access to your live credit scores.