Q. How are monthly PMI fees calculated?
A. Private Mortgage Insurance (PMI) is paid for by a borrower but intended to protect the lender if that borrower defaults on the loan and is usually required if a borrower puts less than 20% down on the property. Mortgage companies use a buyer’s credit score and the loan to value ratio in determining the monthly PMI payment. This payment is part of the loan payment until the borrower exceeds 20% equity and/or a minimum period of time passes.
Banks charge higher rates to borrowers with lower credit scores and higher loan to value (LTV) ratios. For example, if a buyer with a 760+ credit score needed a $340,000 mortgage on a $400,000 house (85% LTV), the monthly PMI payment would be $78. If that same buyer had a credit score less than 680, the payment would jump to $133 per month.
If that same buyer were purchasing that $400,000 house and only put 3% down (97% LTV), the one with a 760+ credit score would pay $283 per month and if the borrower’s credit score were less than 680, the monthly payment would jump to $431!
In some cases, there can actually be as much as 100% difference in the monthly PMI payment for a buyer with a credit score under 680, versus a buyer with a score over 760.
The break points for credit are:
The break points for LTV are:
This can, of course, affect the buyer’s ability to qualify for the loan and/or their willingness to proceed.
In short, strong credit is imperative when buying a home and buyers who can’t put 20% down need to check with their loan officer to obtain a realistic, accurate estimate of the monthly PMI. Also, buyers should never simply rely on automated projections for their estimated PMI payment.
There are possibilities for reducing or eliminating the monthly PMI payment. It is critical to work with good lenders who can help you navigate the loan process.
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The Scott Loper Team
Scott & Lisa Loper