Mortgage insurance is an additional cost that buyers will have to budget for in their total monthly costs when they are not able to put 20% or more down on the purchase of a home. Referred to as MI or PMI in the industry, the cost can vary depending on many factors such as credit score and type of loan the buyer is obtaining.
Mortgage insurance protects the lender in the event a buyer becomes delinquent in their mortgage payment. When obtaining a conventional mortgage, most lenders arrange for mortgage insurance with a private company, hence the PMI, or Private Mortgage Insurance. It’s in this instance that a low credit score can make your PMI more expensive.
If a buyer uses an FHA loan or USDA loan, which are two “low or no” money down programs, the mortgage insurance premium is paid to the agency, and the MI payment is the same no matter what the buyer’s credit score. MI payments are typically cheaper when using a USDA loan, but both programs have what is called an upfront fee plus the monthly MI ongoing fee. Most buyers choose to roll the upfront fee into the cost of the loan, which does raise their monthly payment some, but allow buyers to purchase with less cash at closing.
If a buyer qualifies for a Department of Veteran Affairs loan, or VA loan, the VA guarantee replaces mortgage insurance. With VA-backed loans, which are loans intended to help servicemembers, veterans, and their families, there is no monthly mortgage insurance premium. However, this loan also requires an upfront “funding fee.”
Currently the upfront fee for the FHA loan is 1.75% of the base loan amount (purchase price minus the 3.5% down payment); for a USDA loan the upfront fee is 1%; and the VA loan “funding fee” is the highest at 2.3% of the amount financed for a first time VA loan and 3.6% for a VA buyer who has previously used their VA loan eligibility (even though he VA loan funding fee is higher, VA loans do not have an ongoing monthly mortgage insurance).
Lauren Bunting is a licensed Associate Broker with Atlantic Shores Sotheby’s International Realty in Ocean City, Maryland.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
