Month: May 2012

Homeowners and prospective homeowners probably have more questions about mortgage insurance than any other area of home finance. Here we discuss what constitutes mortgage insurance and how it works.

Your lender takes out mortgage insurance to provide for the possibility that you, the homeowner, will default on your mortgage. There is no connection between mortgage insurance and property or hazard insurance, which is used to insure the property itself against damage from a variety of potential hazards. Nevertheless, many people do tend to use the terms interchangeably. There are two basic types of mortgage loans, and each has its own type of mortgage insurance.

Conventional

Conventional mortgages are what most people think of when they think of mortgage insurance. They are insured by Fannie Mae or Freddie Mac and are required when there is less than 20% equity in the property. The rate of the mortgage insurance will be based on your level of equity, meaning that your rate will be higher if you have 10% equity than if you have 15% equity. This mortgage insurance can be removed if your equity reaches a certain level.

FHA

There are actually two types of mortgage insurance you may have when you obtain an FHA mortgage. The first is called “upfront mortgage insurance,” or, often, “upfront MI.”.

This upfront MI is a percentage of your loan amount and can be financed into your mortgage.

The second type of mortgage insurance is called “monthly mortgage insurance.” Unlike conventional mortgage insurance, it charges the same monthly rate regardless of your down payment.  Also unlike conventional MI, monthly mortgage insurance must be in place for at least five years, regardless of the value of the property.

If you’re wondering which type of mortgage insurance applies to you, contact your mortgage professional for details.

For homebuyers looking to renovate their properties, a 203k Rehab loan can be a great option. A 203k Rehab loan is a traditional FHA mortgage and a rehab loan rolled into one.  It allows you to have work done on a property and roll the cost into the purchase price at the same time.

In today’s market, opportunities abound in both traditional and foreclosure/short sales.

In the case of foreclosures and short sales, you may find properties in your target neighborhood in need of repair. These may unable to be financed by traditional means and this gives you leverage at the negotiating table.

For you to be able to purchase a home using a 203k mortgage, three things need to happen.

First, you need to be prequalified by your lender, as you normally would.

Second, once you find a property that is in need of repair, you will need cost estimates. Note that all work needs to be overseen by licensed general contractors who have their own lines of credit and references.

Third, a special 203k appraisal is done to determine the value of the property after the work is complete. If you are still prepared to buy, you go to the closing table as you would with a traditional mortgage.  Escrow accounts, based on the initial estimates, are set up and the required work begins.

You could have exactly the home you want and save on renovation expenses. Your mortgage professional will have all the information on how this great program works.