Why is Mortgage Insurance required on a conventional loan?

Buying a home is a big financial decision. All buyers want a home they love, and a home they can afford. Mortgage insurance is included as part of your monthly payment, and with better credit you will notice cheaper mortgage insurance on your next conventional mortgage. All home buyers want to pay less for mortgage insurance, and with a little preparation this may be possible. Mortgage insurance may seem to be an unnecessary monthly cost to many borrowers, but it is what allows most people to purchase their first home. Private mortgage insurance (PMI) is a financial guaranty for the lender that will help reduce or eliminate a loss in the case of a default by the borrower. PMI can be arranged by the lender, and is provided by private insurance companies. Mortgage insurance is important to have, because without it many lenders would not be able or willing to accept the risk of lending without having twenty percent equity. On a conventional mortgage, PMI is required for conventional loan borrowers that are making a down payment of less than 20%, but automatically ends when your loan-to-value reaches 78%. Most PMI is paid monthly, with little or no payment required at closing.

How can I get cheaper mortgage insurance on my conventional loan?

As interest rates have risen the last few years, mortgage volume has seen overall decreases with fewer refinances. As a result, this has pushed mortgage insurance companies to reduce their premiums on new loans (both purchases and refinances) by up to 20% to increase their transaction volume. For example, on a 5% down $300,000 loan with 760+ credit, this would be a savings of roughly $420/year in reduced mortgage insurance compared to what premiums were prior to 2017. Your PMI premium on a conventional mortgage is largely determined by risk-based pricing. To put it in simpler terms, risk-based pricing occurs when lenders offer different consumers different interest rates and/or other loan terms (including PMI rates), based on a calculated risk that is estimated based on a consumer’s ability to pay back their loan. Each lender has their own process in determining the risk, but this estimated risk is based largely on things like your credit score, employment status, income, and other outstanding debts. Since your PMI rate is largely dependent on your credit score, the better credit you have, the better PMI rate you will get on your next conventional mortgage. If you want to keep your mortgage insurance as low as possible on your next conventional mortgage, then taking care of your credit should be a top priority.

What affects my credit score?

Since the cost of your mortgage insurance depends so largely on where your credit is on a conventional mortgage, lets talk about some ways that can affect your credit score? There are several things that can affect your credit score, but the biggest factors include your payment history, credit utilization, number of accounts, history of credit use, hard inquiries, credit mix, and negative information. It is important to keep these things in mind as you work to keep your credit score up to maximize your ability to get cheaper mortgage insurance.

As you work towards buying a new home, use some of these pieces of information and tips to ensure you get cheaper mortgage insurance on your next conventional mortgage.

This post was guest-written by Loan Officer, Mark Peterson (NMLS#1698117). Find his information here or contact a loan officer for more details.