How is Mortgage Insurance Calculated?

When considering a new home, many borrowers expect to pay for homeowners’ insurance to protect their investment should any problems arise. In much the same way, lenders turn to private mortgage insurance, or PMI, to protect them if a borrower is unable to make their mortgage payment.

How does mortgage insurance work, and how is private mortgage insurance calculated?

What is Private Mortgage Insurance (PMI)

Private mortgage insurance, also known as PMI, is an insurance policy that many conventional home lenders require to help ensure that they are protected if the borrowers cannot make their mortgage payments. This insurance helps ensure the lenders that they can recover some of their investment in the event of default. But it is also beneficial for the borrower as, in most cases, this lender protection often allows borrowers to become homeowners when they are otherwise considered a risk.

How does mortgage insurance work?

Mortgage insurance works by lowering the risk to the lender when making a home loan. In many cases, the addition of PMI to a mortgage allows borrowers to qualify for a loan when they might not otherwise be able to. In most cases, borrowers with less than a 20 percent down payment are required to have PMI for a conventional loan. Most FHA and USDA loans require PMI as well.

How much does PMI cost?

The cost of PMI varies by loan program and several different factors that we will discuss below. On average, the cost of PMI is about 0.5 to 2.25 percent of the loan amount each year you have the loan. Your PMI can be paid upfront or added to your monthly mortgage payment.

How is Private Mortgage Insurance calculated?

As mentioned above, mortgage insurance is calculated as a percentage of your mortgage loan amount. For example, if your original loan is for $250,000 and you have a PMI rate of 1%, your mortgage insurance would be $2,500 for the year. This amount can be paid upfront or broken down and added to your monthly mortgage payment.

Annual mortgage insurance is re-calculated every year based on your loan balance. As you pay off the loan, your PMI costs go down.

Factors that determine mortgage insurance rate

With PMI rates ranging between 0.5 and 2.25 percent, how do you know your PMI rate? The PMI rate that you receive depends on a variety of different factors.

Loan size

The biggest determining factor for your PMI rate is the size of your home loan. As you might expect, the higher your loan is, the higher your PMI is likely to be. This is because the lender takes a bigger risk on a higher loan value.

Down payment

In general, PMI is required for any loan with a down payment of less than 20%. However, your PMI rate is also dependent on just how much you put down. While many loans offer as low as 3%, the smaller down payment will result in a higher PMI rate. Even if you are still under the 20% down payment threshold, the higher your down payment amount, the lower your PMI rate.

Mortgage type

The type of mortgage you choose can make a difference in your PMI rate. Adjustable-rate mortgages tend to have a higher PMI than fixed-rate mortgages. This is because interest rates can rise, meaning your monthly payments can increase.

Credit score

Your credit score can make a big difference in your PMI rate, as with anything loan-related. The higher your credit score, the more creditworthy you appear to the lender, thus showing less risk. While a conventional loan typically requires a credit score of 620, for other loans, such as FHA, a credit score can go as low as a 500. You can expect to pay a higher PMI percentage with scores this low.

Frequently Asked Questions

When it comes to home mortgages and PMI, borrowers often have numerous questions. Here we offer answers to some of the most common PMI questions.

1. Do you need PMI?

This depends. In general, a lender will require PMI if your down payment is less than 20% of the total loan amount. However, PMI is not required for the entire length of your mortgage. Once you reach a 78% loan to value ratio (LTV), the lender should automatically remove your PMI. In addition, your PMI is removed when you reach the halfway point of your loan term. For example, with a 30-year mortgage, the PMI is removed at the 15-year mark even if you do not reach the 78% LTV.

2. Is PMI required?

In general, PMI is required on any conventional home loan with less than 20% down payment. However, there are exceptions. In some cases, lenders offer a PMI-free conventional loan but will instead bump up your interest rate for the life of the loan.

3. Is mortgage insurance a bad thing?

While the additional cost of PMI may seem like a bad thing on the surface, the truth is PMI often gives borrowers a path to homeownership that would not otherwise be available. Without PMI, borrowers would be required to wait until they had the available 20% down payment, making homeownership difficult. In addition, PMI is not required for the life of the loan and is eventually removed once you meet the criteria.

4. Is mortgage insurance tax-deductible?

Yes! Just like any other form of mortgage insurance, PMI can be deducted when you file your income tax return each year.

PMI offers a quicker path to homeownership

While the idea of an added cost to your mortgage payment is never appealing, PMI enables many borrowers to purchase a home without a large down payment. It protects the lenders from potential risk and makes you, as a borrower, more appealing to the lender, enabling you to achieve homeownership sooner.

At Hero Home Programs, we understand how confusing all these terms can be when purchasing your first home. Our goal is to help everyone achieve homeownership with the best rates possible. To learn more about how we can help, schedule a call with us today.

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Home Renovation Loans for Bad Credit

Whether you’re looking to make minor updates to your kitchen or need a complete bathroom remodeling, home renovation projects can be expensive. Unfortunately, many home improvement loans are reserved for borrowers with exceptional credit. If your credit leaves a lot to be desired, you may think your home renovation dreams are out of reach. Fortunately, there are home renovation loans for bad credit available and some possible alternatives that can allow you to get the renovations your home needs.

How to get a home improvement loan with bad credit

Despite a poor credit history, if your home needs renovations, there are ways to secure the financing required to cover these improvements. While it may require a bit more work on your end, it is still possible.

Get a co-signer

If you struggle to get a home improvement loan on your credit alone, you might consider adding a co-signer to your loan application. This is where another party, such as a friend or family member, signs onto the debt to help you secure the financing you need. Based on their credit, you may be able to secure better terms and a lower interest rate.

Government loans

Government loans, often through the U.S. Department of Housing and Urban Development (HUD), offer programs for homeowners to fund home renovation projects. For example, the FHA Title 1 loan is designed to help those with less than perfect credit secure a loan to cover repairs to their residential property. The FHA Streamlined 203 (K) program allows homeowners to finance up to $35,000 into their mortgage in order to cover home improvements.

Private lenders

Private lenders are another option. Many lenders specialize in home renovation loans for those with poor credit. These lenders are often more willing to provide these loans because they know the loans are being used to increase the home's value.

How to choose the right home renovation loan

Shopping for a home renovation loan can feel like a challenge when you have less than perfect credit. With not as many options available, you may be tempted to take the first loan you qualify for. However, when looking for these loans, you must take the time to consider the interest rates, terms, and fees before applying for and accepting a loan.

Interest rates

It is important to compare your options, which is especially important for interest rates. Many lenders can provide rates through soft credit inquiry when applying for a loan, which does not affect your credit score as a hard credit inquiry. You may need to apply to various lenders to compare potential interest rates. Ensuring that each lender runs a soft inquiry is essential to ensure that your credit score does not plunge further while comparing rates.

Fees

Many loans targeting those with less than perfect credit often come with origination and administration fees. While some of these fees can be added to your monthly payment amount, others may come out of the principal balance at the time of funding. When comparing lenders, it is important that you take these fees into consideration.

Terms

As with any loan, the terms are just as important as the interest rate when it comes to your home renovation loan. The longer your loan term is, the more interest you will pay over the life of the loan. When considering your ideal terms, you need to consider the highest monthly payment you can afford and remain manageable to choose the shortest terms possible. Be sure to give yourself a cushion when considering this, as choosing a higher monthly payment that may be a struggle can result in late payments and further damage to your credit score.

Alternatives to home renovation loans if you have bad credit

While a home renovation loan is often your best option, it isn’t your only option. You can consider alternatives, and if your renovations can wait, it may be beneficial for you to focus on other improvements first.

Credit Card

Funding your home renovations with a credit card is an alternative to a home renovation loan. If you have a current credit card with the available credit, this may be the best place to start. Applying for a new credit card is another option, but there are some things to consider. Applying for a credit card creates a hard inquiry on your credit, further dropping your credit score. In addition, with bad credit, chances are you will not receive approval for a new card with enough credit to cover your home improvement expenses.

Home equity loan

If you have at least 15% to 20% of the equity in your current home, your best option may be to apply for a home equity loan to fund your home improvements. Because this type of loan is considered a secured loan on your home, the interest rates are often lower, and your approval rates are higher.

Improve your credit score

If your home renovations can wait a little bit, your best option is to take some time to improve your credit score. Doing this will help ensure you qualify for a home renovation loan that offers better rates and terms when you are ready to apply for a loan. Following these steps will help you improve your credit score:

• Request a copy of your credit report and review, ensuring that all the information is accurate and identifying potential problems that you can address.
• Address any negative accounts on your credit report.
• Continue to pay all your bills on time or early.
• Pay down your current debt to reduce your credit utilization.
• Use any current credit card responsibility. This means making payments on time and keeping your overall balance low.

Home Renovation Is Still Possible with Bad Credit

While working to improve your overall credit score is your best bet when qualifying for a home renovation loan, there are ways to still qualify for the loan you need. At Hero Home Programs, we work with borrowers to help ensure they find a quality home and the best possible lending options to help them achieve homeownership or the home renovation loan they need.

If you are interested in learning more about how we can help, contact us online today.

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How Does Divorce Affect Credit Score?

If you are currently going through a divorce, you are not alone. Statistics show almost 50 percent of all marriages in the United States will end in divorce or separation. While this major life change can take an emotional toll, it can also greatly affect your financial stability and credit score.

How does divorce hurt your credit? Does divorce show up on a credit report? Here we look at exactly how a divorce can hurt your credit and what steps you can take to help protect your credit.

Divorce and credit score

Your credit reports do not contain your marital status, and signing divorce papers does not directly affect your credit. However, your accounts are often affected by the division of assets and accounts with a divorce.

Missing payments on joint debt

If you and your spouse have joint accounts, these are usually addressed within the divorce decree. A judge decides which debt each party is responsible for. Unfortunately, creditors do not take these judgments into consideration. In their eyes, this joint debt is the responsibility of both parties. Should your ex-spouse miss a payment, it will also affect your credit score.

Closing of joint credit cards

In many cases, couples decide to close joint accounts during a divorce. While closing joint accounts helps avoid any potential concerns of missing payments by the spouse responsible for the debt, losing a card with available credit can greatly affect your credit utilization. For example, you and your spouse each have individual accounts with a credit limit of $5,000 and then a joint account with an available limit of $5,000. The joint account has a full available limit, and your personal card has a balance of $2,500. With both cards, your credit utilization is 25%. However, if you close the joint account, your utilization is now 50%, contributing to a lower credit score.

Being removed as an authorized user on your spouse’s credit card(s)

An authorized user on a credit card gives the user the ability to access the credit without the obligation to make payments. However, as an authorized user, you receive the benefits (such as a decrease in credit utilization) to your credit score when the account holder makes consistent, on-time payments. Being removed as an authorized user from an account, you are likely to see an increase in credit utilization and a negative impact on your credit.

Creditors don’t honor divorce decrees

Unfortunately, creditors do not honor divorce decrees despite going to court and receiving a judge’s order to divide your credit debt. If your name is on the account, you are still liable for the debt. If your ex-spouse decides to skip out on accounts that they were ordered to pay in the divorce, creditors can still come after you for payment, and the lack of payments can impact your credit report.

What happens to a mortgage after a divorce?

During a divorce, it is common for one party to maintain residence in the home they purchased together. In most cases, the divorce decree states which spouse maintains the home and is responsible for the mortgage payments. However, similar to credit card debt, the mortgage lender does not honor divorce decrees, and both parties are responsible for the mortgage. In this case, if your ex-spouse is awarded the home but does not make payments, the lender can come after you to collect a payment, and the lack of payments will reflect on your credit report.

How to protect your credit during a divorce?

When a divorce decree doesn’t hold weight for credit or mortgage debt, you must take the necessary steps to help maintain your credit. Some of these steps may not be possible, depending on your relationship with your ex-spouse. However, if working together is not possible, there are some things you can do on your own.

• Work together: If possible, work together with your ex-spouse to gradually pay off and close existing accounts. For example, you can begin by freezing any new spending and agree to make equal monthly payments until the debt is paid in full.
• Contact lenders: This is an important step for a variety of reasons. If you cannot work with your spouse to pay off and close joint accounts, talk to the lender about converting the debt to an individual account. If you believe all your debts are personal, it is still good to contact all your lenders to ensure your ex-spouse is not listed as an authorized user.
• Make all your payments on time: Make sure you pay all your debts on time. For the joint debts your spouse is responsible for, it is good to call and make sure payments are still being made. If they are not, you can step in and avoid any damage to your credit before it takes place.
• Consider home refinance: When both parties are on mortgage debt, consider getting a mortgage refinance or home sale if you are not the party retaining the home. This will protect your credit from defaulted home mortgage payments.
• Check your credit report often: Because you are not aware of your ex-spouse’s activity when paying debt obligations, you must regularly monitor your credit report to help ensure their non-payment is not affecting your credit score.

Saving Your Home and Credit Score after a Divorce

A good credit score is essential for purchasing your dream home. While divorce can take its toll emotionally, following these tips will help ensure that it doesn’t damage your credit score and your chances of owning your dream home.

At Hero Home Programs, our goal is to help everyone achieve the dream of homeownership, and helping maintain a good credit score is only the beginning. Schedule a call with us today to learn how we can help you find and qualify for the perfect home.

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Delayed Financing: What It Is and How It Works

When making an offer on a new home, cash speaks volumes. In fact, if you are facing a bidding war on a new home, offering cash will make your offer more appealing than similar offers dependent on financing. The only downside is purchasing a home with cash leaves you cash poor. This is where a delayed financing mortgage can make all the difference. What is delayed financing, and how can it benefit you?

What is delayed financing?

Delayed financing is a method of purchasing a home where you get a mortgage after a cash purchase goes through. In this case, you purchase the home with cash and then immediately obtain a cash-out refinance mortgage. Using delayed financing gives you the leverage of being a cash buyer while still enjoying the mortgage's benefits.

How does delayed financing work?

Using delayed financing begins with acquiring the funds to make a cash offer. This can mean dipping into savings or selling assets, such as stocks or other properties. Once you have the available cash and make an offer, you apply for delayed financing on the property. This application process is similar to a traditional home loan, and you will need to provide your financial information, proof of income, and a credit check. Choosing to use delayed financing is similar to refinancing, except you do not have to be on the home's title for a minimum 6-month period.

When should you use delayed financing?

So, you might wonder why you would consider delayed financing instead of a traditional mortgage or waiting and choosing a refinance option later down the road. While delayed financing is definitely not for everyone, let’s look at some of the pros and cons associated with delayed financing.

Pros

• Buying a home in a hot real estate market. If you are in a hot real estate market, winning a bidding war on a home can be difficult. Offering a cash bid often puts you at the top of the list as the seller knows the deal will go through.
• A traditional mortgage may not be available. Buying foreclosures, short sales, or fixer-uppers means they may not qualify for traditional financing. Purchasing the home with cash allows you to make necessary changes to the property to qualify for a new mortgage.
• Purchasing investment properties. Purchasing a home with cash allows you to prepare the home for potential renters. Once you are ready to rent and take in rental income, you can apply for the delayed financing to move on to your next investment property.
• Allows you to invest cash. While purchasing a home with cash gives you leverage in the buying process, acquiring delayed financing allows you to get that cash back to return to investments.
• Offers tax deduction. Having a mortgage on your home allows you to deduct mortgage interest from your taxes.
• It can help you build credit and establish a favorable credit history.

Cons

• You must have the entire purchase price in cash. This can be difficult if you do not have assets available.
• Only available on conventional loans. Delayed financing is only available for conventional loans backed by Fannie Mae or Freddie Mac, so FHA, VA, or USDA loans are not available. In addition, there are many additional requirements in order to qualify for delayed financing.
• The risk that financing won’t be approved. If problems arise with the property after purchase, you may not qualify for delayed financing.
• Interest rates could increase. Interest rates may rise depending on how much time passes between purchasing and financing.

Delayed financing guidelines

When it comes to delayed financing, you will receive the best mortgage rates with conforming loans that are eligible for resale to Fannie Mae or Freddie Mac. However, certain requirements must be met to qualify for these delayed financing mortgages.

Eligibility and requirements

• Property must be lien-free
• You must be able to provide proof of a cash purchase
• You must show documentation of where the initial cash came from. If you received money from a third party as a gift, you must provide a gift letter and any money obtained through the delayed financing can not be paid back for the “gift.”
• The mortgage amount can not exceed the purchase price plus closing costs, prepaid fees, and points. If you want to take advantage of any renovations made and the increased value, you will need to wait to qualify for a standard refinance loan.
• The property must be purchased in an arm’s length transaction, meaning you can have no prior relationship with the seller.

Exceptions

These eligibility requirements are for conforming loans eligible for resale to Fannie Mae or Freddie Mac. If you apply for a non-conforming or jumbo loan, these requirements do not apply.

Using delayed financing to purchase your dream home.

If you have cash available to purchase your home, taking advantage of delayed financing can help you look better in the eyes of the seller and increase your chances of securing a bid while still allowing you to remain cash-liquid. Hero Home Programs' goal is to help you achieve your dream of homeownership. Whether you have questions about delayed financing or other home loan questions, our team is here to help. Contact us online today.

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