The traditional 20 percent down payment isn’t feasible for a significant portion of hopeful homebuyers. Luckily, there are plenty of loan options out there that don’t require 20 percent down.
Many buyers are now taking advantage of these low-down-payment loans.
In fact, according to the NAR’s latest Realtors Confidence Index, 51 percent of all non-cash buyers put down less than 20 percent in June of 2018.
While low down payments may make it easier to finance the purchase of a home, buyers should know that making a low down payment will likely result in a higher interest rate and the inclusion of private mortgage insurance (PMI).
As a real estate agent, it’s important to ensure your buyer clients are aware of the pros and cons of low-down-payment financing. PMI, in particular, is an important topic to cover as it increases mortgage costs with little benefit to the buyer.
What is PMI?
PMI is a form of mortgage insurance that’s typically required for those who get a conventional loan and pay less than 20 percent down. The majority of PMI policies are paid monthly, but it’s also possible to cover PMI at closing with a large upfront payment.
There isn’t a set premium that all borrowers pay toward mortgage insurance. Instead, PMI payments are set based on the perceived risk to the lender. Factors like credit score and the down payment amount will affect the PMI premium.
3 things buyers need to know about PMI
When covering loan options with buyers, you should determine how much they plan to put down. If it’s going to be less than 20 percent, you should have a discussion with them about PMI.
Here are three things you should mention:
1. PMI can be cancelled
Typically, PMI can be cancelled once the principal balance of the mortgage falls to 80 percent of a home’s original value. Other cancellation criteria include good payment history and being current on payments at the time the cancellation request is made.
2. PMI and MIP are different
There are different types of mortgage insurance. PMI is associated with conventional loans. A mortgage insurance premium (MIP) is what borrowers pay toward FHA-insured loans.
The most important thing for buyers to remember is that the rules governing PMI and MIP differ. While borrowers can cancel PMI, refinancing is often the only way to eliminate MIP.
3. PMI protects the lender, not the borrower
Some buyers believe that PMI protects them from foreclosure; this isn’t the case. PMI protects the lender, not the borrower, against loss. Although borrowers are the ones paying premiums, the only real benefit PMI offers to them is the ability to purchase a home without making a 20 percent down payment.
Refer buyers to a knowledgeable loan officer
While agents should understand what loan options are available to buyers, staying on top of the changing rules regarding mortgages just isn’t realistic. By referring buyers to a knowledgeable, competent loan officer, you can safely assume that they’ll get the guidance they need to make an informed decision when applying for a loan.
Besides, building a relationship with a quality loan officer is a great way to create a new stream of real estate referrals. Ultimately, this arrangement won’t just be good for your buyers, it’ll be good for business.
Pat Hiban sold more than 7,000 homes over the course of his 25-year career in real estate. Now, he dedicates his time to helping others succeed as agents and investors. As host of the Real Estate Rockstars Podcast, Pat interviews real estate experts to explore what works in today’s markets. He also founded Rebus University, an online training platform for real estate agents and sales professionals.
