Every industry has its jargon, and real estate is no exception. Realtors and lenders often throw around terms like “FHA” and “PMI” without considering that their clients may be getting thoroughly confused by the unfamiliar acronyms.
FHA is the Federal Housing Authority, which is a United States government agency which insures loans made by banks and other private lenders for the purchase and building of homes. FHA loans are more forgiving of a buyer’s credit mishaps, and have lower credit score requirements than conventional loans.
PMI is Private Mortgage Insurance. When a buyer gets a conventional loan, if he is borrowing more than 80% of the purchase price the lender will require Private Mortgage Insurance. This insurance protects the lender against loss if the borrower defaults on the loan.
If the buyer is obtaining FHA financing, he will pay for two types of mortgage insurance. There is an Upfront Mortgage Insurance Premium, which is currently at 1.75% of the base loan amount. That amount will be included in the buyer’s closing costs at time of purchase. The second type is the monthly Mortgage Insurance Premium (MIP), and is an amount added to each month’s payment.
One of the biggest differences in getting a conventional loan with PMI versus an FHA loan with MIP is that with the FHA loan you are now stuck with the MIP for the life of the loan. With a conventional loan you can request for the mortgage insurance to be removed once the equity in the home exceeds 20% – either due to paying down the loan or timely appreciation. And the lender must allow you to cancel PMI when the equity exceeds 22%.
Buyers with less-than-perfect credit scores don’t have a lot of choice – they will end up with an FHA loan unless they have saved up a down payment of 20% or more. But those with great credit are getting conventional loans with low down payments. Sure, they have to pay the PMI now, but as soon as they get the loan-to-value ratio under 80%, they can request to have the PMI cancelled.
Hope that explanation helps!
If you’re ready to get started with the process of buying or selling a home, we’re here to help. Wouldn’t you prefer to work with Realtors who make sure you understand the process and guide you through to a successful transaction? We would, and that’s how we treat our clients. Give us a call when you’re ready to go, 727-286-1249.Google+