As I write this post, it dawns on me how ridiculous this title sounds. 5 years ago, shopping private mortgage insurance was definitely not a part of the home buying process.
In 2007 and earlier, the consumer only had a few options when it came to PMI:
For the most part, the options ended there. I can honestly say that in 2007 and earlier, I didn’t even know which PMI company was insuring my clients’ loans, nor did it really matter. If Fannie Mae or Freddie Mac approved it, all companies would accept the PMI and would generally charge the same premium. There were a few differences here and there, but it wasn’t a normal part of the process. To avoid PMI, people usually did two separate loans. Often called 80/20’s, clients would obtain 100% financing by getting two loans. The full loan amount would be made up of a lower rate loan representing 80% of the purchase price and a higher rate loan representing the other 20% of the purchase price.
Today, 80/20’s no longer exist. People can still get two loans to purchase a property, but rarely for more than 90% of the purchase price. Loans with mortgage insurance have become a regular part of the mortgage market, but the process for getting PMI is very different. Companies suffered major losses covering foreclosures during the mortgage crisis. Many of the companies that insured loans before the recession no longer exist. For the companies that are still around, their products are priced differently, their guidelines have changed, and they have varying specialties. If you’re planning on purchasing a home with less than 20% down, learning the different options and how to shop PMI is needed if you wish to get the best loan for your needs.
First determine the type of PMI you want. PMI is typically charged one of 3 ways:
Next, you have to choose if you want a refundable premium. Refundable premiums are PMI policies that will refund part of your costs if you pay off the loan early. This is a nice feature if you think you may sell or refinance in a few years, but the cost of the premium is more.
Lastly, if you opt for an upfront or split premium, you can choose to have the upfront PMI financed. This is where the upfront premium is added to the loan amount.
In this post, written earlier this year, I discuss the different types of PMI and which options usually save the most money.
Another consideration is eligibility. PMI companies no longer accept loans solely on lender approval. These companies now have their own guidelines that if unmet will restrict you from getting PMI from them. If you’re not approved for PMI, you cannot get the related mortgage. So first, make sure your scenario and loan file would be acceptable to PMI companies. Some factors that play a role in determining eligibility are: credit profile, debt ratio, property type, and loan-to-value.
Lastly, price the premium. Once you know the type of PMI you want and the companies who will insure your loan, price out the PMI. Most companies let you price out the PMI online without a login. Some companies will give lenders special pricing, so you may need your lender to price for you.
The information in this post, when used properly, can save homeowners thousands of dollars. The problem is the information is rarely known. It’s rare for me to find a client who has been educated on the different TYPES of PMI. Finding a client who has received a recommendation on the type of PMI AND the use of a company to help eligibility and pricing is almost unheard of, yet we do this every day.
Ideally, consumers will be able to get clear answers on what PMI options best suit them, which companies will insure them, and the freedom to find the cheapest price. Homebuyers can then focus on picking a lender who prices the loan the best to ensure they have the cheapest combination of financing available.
I’ve listed below the major PMI companies being used today who are still insuring new homeowners: