Can A Home Buyer Be Affected By A Financing Statement Private Mortgage Insurance (PMI) – the Mortgage Industry’s Dirty Little Secret

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Private Mortgage Insurance (PMI) – the Mortgage Industry’s Dirty Little Secret

Private mortgage insurance (PMI) has long been touted as a benefit that allows borrowers to purchase properties with less than 20% down. But who is the real beneficiary of PMI? We are told that PMI insurance pays the lender if we default on our mortgage. While true, it doesn’t tell the whole story. There is much more that you should know.

This is all the lender must disclose:

  • As part of a “good faith” estimate of closing costs, the lender must provide an estimate of the PMI premium.

  • At closing and annually thereafter, the lender must notify the borrower of available cancellation options. In most cases, PMI can be written off when the mortgage is paid down to 80% of the lower of the sale price or the original appraised value. It will usually be canceled automatically when the loan repayment brings the mortgage balance to 78%.

What you don’t know and they don’t tell you: 

  • The borrower is not a party to the mortgage insurance policy. The lender does not have to disclose either the name of the insurer or the amount of insurance purchased. However, the buyer is usually responsible for the prizes.

  • Lenders can purchase protection for up to 40% or more of the mortgage amount without disclosing it to the buyer more than the premium amount. For example, you buy a $200,000 home with a 10% down payment of $20,000, financing the balance with a $180,000 mortgage. The lender can protect 40%, or a total of $72,000, with mortgage insurance by paying the premium.

  • Proceeds received by the lender from a PMI policy do not offset any deficiency judgment against you, the borrower. They can collect on the policy and still come after you.

  • The PMI insurer can pay anyone along the transaction line for services rendered that reduce the risk of the loan or reduce the expenses of the insurance company. This implies that they may pay fees to the lender. Understand what comes out of your pocket.

  • The monthly premium for most PMIs is fixed. In other words, as the mortgage balance decreases, presumably along with the risk to the lender, the borrower continues to pay the same premium based on the risk assessment at the time the loan was originated.

  • Although many lenders will consider allowing the buyer to write off the PMI when the value of the property increases to achieve the 80% loan-to-value ratio. they are not required to do so. In my experience, the lender required me to pay for an appraisal done by an appraisal company selected by them. In addition, the borrower must generally provide proof that there is no second mortgage on the property.

  • The lender can purchase PMI, for which it pays the premiums, without notifying the borrower. Funds for these awards may come indirectly from the borrower through points paid at closing or higher interest rates.

PMI premiums are not insignificant. I looked at a loan statement for one of my recent investment properties. On a loan of approximately $200,000, the monthly principal and interest payment was $1,124.93. Monthly PMI was $163.53, or 15% of P&I. However, I never knew how much insurance was purchased or from whom. Had this property taken the 10 years or so needed to reduce the mortgage balance to 78% of the purchase price, I would pay over $19,000 in PMI premiums (almost 10% of the original loan amount).

In the many recent articles on foreclosures, borrowers are advised to contact their lenders immediately when they have financial problems or feel they will not be able to keep up with their mortgage payments. They stress that making an agreement with your lender is much better than going through foreclosure. While foreclosure is inevitable, industry insiders recommend working with the lender to facilitate a “short sale,” where the sale price is less than the mortgage amount, thereby avoiding the stigma of a foreclosure.

Wake up!!If the lender is protected by a PMI policy, will they be more or less willing to work with you? Why would they offer you extended or more favorable terms or allow a short sale when they just need to close to collect their insurance? Isn’t that ironic? You could pay thousands for coverage that helps align your lender with your best interests.A banker is someone who will lend you an umbrella, but wants to return it when it rains” said my father.

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