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PMI Frequently Asked Questions

What is PMI, Private Mortgage Insurance and other Frequently asked Questions

Several home buyers need help to define PMI Insurance. Private Mortgage Insurance, or PMI, is required by most lenders if the borrower is unable to put down less that 20% of the appraised home value or sale price. This insurance provides some protection for the lender in cases where the borrower may default on the home loan. The borrower is paying the premiums on the insurance policy, and the lender is the beneficiary.

Q: Can I receive a refund on PMI if I had to purchase mortgage insurance because I did not have 20% to put down on the loan?

A: Entitlement to a refund and the amount would depend on the mortgage insurance plan type and the refundable or non-refundable/limited option chosen at origination. Contact your lender directly they will be able to give you information about how your loan was originally setup.

Q: If you have a secured loan with PMI why do some lenders still have issues with granting the loan?

A: Mortgage insurance does not guarantee the loan, it only insures a designated portion (commonly only 12-30%) of the loan against default. The combinations of loan characteristics (credit, collateral, MI, etc.) are established as requirements by investors. Loans usually end up in mortgage backed securities.

Q: If mortgage insurance is cancelled, are any pre-paid premium amounts refunded (particularly if they were originally paid by adding them to the loan amount)?

A: If the mortgage insurance was financed at the time of origination and is cancelled prior to its maturity you may be entitled to a refund, if the refundable option was chosen at time of origination. However, if the no refund/limited option this would negate any option for refund.

Q: If a borrower currently has an FHA loan w/ MI, after the LTV has reached 80% or less can the MI be cancelled?

A: Please refer to your borrower about when you will be able to cancel your mortgage insurance.

Q: How do mortgage insurance escrows get applied to the payment?

A: Lenders collect monies on escrow and remits to PMI when the premium is due. Typically lenders collect 14 months of premiums at a home loan closing. Twelve months of the premium is paid to PMI as the initial premium. The remaining two months is used to start the escrow account. The borrower then pays a percentage going forward that is applied to the escrow account.

Q: Are mortgage lenders supposed to provide borrowers with information on the conditions when they can cancel mortgage insurance? Are these conditions supposed to be in the loan documentation? If the borrower pays mortgage insurance monthly, and his equity goes up, should his premiums go down? Is the mortgage lender supposed to notify the borrower when he reaches 20% equity? Which states have laws on this subject? Can the borrower choose the mortgage insurance company or does the lender do that?

A: These questions will have to be answered by your lender because investor and state requirements have a wide variance. Click here to see active states for American Financing.

Q: Would mortgage insurance be of use to lenders to help approve loans for higher risk (i.e. self employed) individuals?

A: It is unlikely that our coverage would have any effect on the lender's ability to offer loans to those self employed. Generally, mortgage insurance is required due to low down payment.

Q: Does private mortgage insurance apply for investment properties?

A: PMI is available on 1 unit investment properties with only 15% required down payment.

Q: Who pays for mortgage insurance?

A: The lender makes the payment to the PMI company, although they will generally pass that cost on to the borrower. Typically, a portion of the mortgage insurance premium is paid up front at closing, and the rest is paid as part of the monthly mortgage payment.

Q: What are the payment options for mortgage insurance?

A: Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums will vary according to loan-to- value ratio, type of loan, and amount of coverage required by the lender.

Q: Can mortgage insurance coverage be cancelled?

A: Mortgage insurance is maintained at the option of the current owner of the mortgage. In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Lenders requirements for this can vary state to state so contact your lender directly to find available options.

Q: How does private mortgage insurance differ from FHA insurance?

A: Although the insurance protection concept is similar, there are differences between private mortgage insurance and FHA. FHA insurance is a government-administered mortgage insurance program that does have certain restrictions. FHA has maximum regional loan limits that are lower than those with private mortgage insurance. FHA may be more expensive, takes longer to receive approval, and has fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private mortgage insurance which is cancelable in most circumstances. FHA is a good choice for some borrowers with credit history problems that might need special assistance.

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