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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2010

Mortgage Insurance: Consider the Options

FHA draws attention, but private insurers could be a better choice for some

Homebuyers putting down less than 20 percent have two basic mortgage-insurance options: loans the Federal Housing Administration (FHA) insures or those insured privately.

Premiums for both are tax-deductible and may be cancelable when buyers' home equity reaches about 20 percent. Brokers can help buyers decide which is the right option by explaining recent guideline changes.

Although FHA pricing often has been more favorable compared to private mortgage insurance (PMI), the FHA increased its upfront mortgage-insurance premium to 2.25 percent this past April, from 1.75 percent of the mortgage amount.

In addition, the FHA has requested legislative authority to increase the maximum monthly mortgage-insurance premium it can charge beyond the current maximum of 0.55 percent of a mortgage amount.

Meanwhile, many private mortgage insurers have implemented price increases in the past 18 months. But multiple premium-plan structures can make private pricing competitive.

Generally, PMI pricing is more affordable than FHA for borrowers making downpayments of 10 percent to 15 percent. For example, buyers taking advantage of single-premium mortgage insurance -- where the entire mortgage-insurance premium is paid at the outset -- typically have lower monthly pricing compared to FHA insurance on mortgages with loan-to-value ratios (LTVs) from 85 percent to 95 percent.

The minimum downpayment required for an FHA loan is 3.5 percent, but new guidelines require a minimum FICO score of 580 to qualify for that downpayment. Additionally, FHA charges a greater monthly premium than many private insurers for those who put down less than 5 percent, and new FHA borrowers with less than a 580 FICO score must put down at least 10 percent.

Meanwhile, private mortgage insurance on loans with 5 percent down are available in most markets. Many private insurers have expanded their underwriting guidelines to help drive low-downpayment lending, but insurance for loans with LTVs of 95 percent remained a problem in some markets. Some insurers allow homebuyers to put down as little as 5 percent regardless of the state or market in which borrowers live.

Brokers should note these changes and keep tabs on other trends in private mortgage insurance. For example, in some cases, the guidelines for nonretail originations in Arizona, California, Florida, Nevada and Michigan differ from the rest of the country.
In addition, some private mortgage insurers are returning to the condominium and co-op markets.

Brokers also should work with clients to consider the additional options private mortgage insurers provide. These can include job-loss protection as well as homeowner-assistance and homebuyer-education programs.


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