Typically, home buyers who make a down payment of less than 20 percent must obtain private mortgage insurance (PMI). PMI policies protect the lender if you default on your mortgage.
PMI is required on all FHA mortgages with a down payment of less than 20 percent. FHA-backed loans allow for a down payment as low as 3.5 percent.
PMI fees vary depending on your credit scores and down payment. To get an idea of how your scores might impact your rates, start by getting your credit scores from the three main credit reporting bureaus – Experian, Equifax and TransUnion.
The insurance premiums are typically tacked on to your mortgage payment. Annual rates generally range from 0.3 percent to 1.15 percent of the original loan amount.
In some cases, mortgage insurance can allow you to make a smaller down payment. That can help you buy a home you couldn’t afford otherwise or put away more money so you can bolster your emergency savings. This is a common option in some first-time home buyer programs.
You might not need to pay PMI premiums throughout the life of your loan. Many lenders will cancel PMI after you’ve paid at least 20 percent of your loan and created equity in your home. Lenders are required to cancel PMI when the loan-to-home value reaches 78 percent.
For some recent FHA mortgages, however, you’ll have to pay premiums for the full life of the loan, unless you refinance. You should check with your lender to understand how PMI terms apply to your loan.
Before you apply for a mortgage, it’s important to review your credit reports and scores. Knowing where you stand will help you determine what you can afford, what terms you are likely to get and whether PMI can be avoided.
Get your scores and reports from all three bureaus in seconds from FreeScore360, powered by ScoreSense®. ScoreSense also monitors your credit and alerts you to changes on your credit profile, helping you to protect your identity and your future credit standing.