Takeaways:
- Mortgage insurance for loans that are from private institutions such as banks is called private mortgage insurance (PMI) and will have a monthly payment of 0.3 to 1.5 percent of the loan’s total.
- The USDA home loan — with a zero down payment perk and low interest — is perfect for lower-income borrowers who want to live rurally or even in suburbs.
- Consumers favor the FHA home loan when they are not qualified for the VA home loan, overqualified for the USDA home loan or simply want to live somewhere not rural.
You and your client have one thing in common — you both need insurance on the most expensive items in your life.
You need insurance for your home, car — and even your body, via health insurance and life insurance.
Mortgages are also subject to this rule. You might be familiar with homeowners insurance for those funded by a conventional loan, but what are the differences with federal home loans?
Conventional loans
As you are likely aware, mortgage insurance for loans that are from private institutions such as banks is called private mortgage insurance (PMI) and will have a monthly payment of 0.3 to 1.5 percent of the loan’s total.
Your client might avoid paying PMI only if a down payment of 20 percent or more is offered up by the borrower. This is tax-deductible, which is a relief, but still quite a chunk of change to the consumer.
USDA home loans
The USDA home loan — with a zero down payment perk and low interest — is perfect for lower-income borrowers who want to live rurally or even in suburbs (as long as the area population is less than 10,000).
It’s also great because mortgage insurance is not needed. The borrower will need to pay a funding fee, however. The funding fee can be financed into the loan.
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VA home loans
It is an honor to serve those who have served us. Whether a veteran, active duty or qualified surviving spouse, you will want to do all you can for VA home loan-eligible clients.
Much like the USDA home loan, the VA home loan requires no down payment or private mortgage insurance. This will put military families at ease when it is their time to invest in a home.
FHA home loans
Consumers favor the FHA home loan when they are not qualified for the VA home loan or are overqualified for the USDA home loan (or simply want to live somewhere not rural).
FHA is a great option for those without a substantial down payment. FHA is also beneficial because interest rates for these loans are usually lower than conventional mortgages.
FHA terms of mortgage insurance differ widely from the previous options, but if your client is putting more than 20 percent for a down payment, this won’t apply to them.
FHA home loans require a one-time, upfront mortgage insurance premium (MIP) payment. In addition to this, FHA loans require additional monthly MIP payments adding up to the annual MIP.
The upfront MIP is the one-time payment and is almost always 1.75 percent of the home loan’s value. The only time it will not be is if the FHA home loan was streamlined prior to May 31, 2009.
The amount of the tax-deductible annual MIP from FHA cases dated June 3, 2013, to Jan. 25, 2015, varied from 1.3 to 1.55 percent for loans with terms over a 15-year repayment period.
This, of course, was pending on the amount of the loan. Loans with terms lower than 15 years with amounts under or over $625,000 during this period were 0.45 to 0.7 percent.
Starting on Jan. 26, 2015, annual MIP standards for loans over a 15-year term changed for the better. The percentage rates dropped from 1.3 to 1.5 percent down to 0.8 to 1.05 percent.
MIP percentages for loans under 15 years of repayment have remained the same. Again, this is tax-deductible.
To put into perspective — a $300,000 loan with a 30-year term back in 2013 would cost $3,900 for annual MIP. Today, it would be around $2,550.
Longer loan payback terms mean less interest to homeowners; this is very encouraging because the insurance will cost them less, too.
This guide should help you navigate the insurance and loan systems for your clients.
Amanda Rosenblatt is a writer for Federal Home Loan Centers, as well as VA Home Loan Centers. She is based in San Diego and loves helping educate potential homeowners.
