I am purchasing a foreclosure property that I will use as my primary residence. I am putting 5% down, and my

Asked by Mrsmassink, Massachusetts Wed Jun 25, 2008

mortgage will be 72.5% of its current appraised value. What exactly is my LTV, do I need to pay PMI and if so, for how long??

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Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Fri Aug 1, 2008
Part II:

Now for the confusion:

Andrew mentions that MIP might be calculated based on credit score.

Such a policy DID go into effect for all FHA insured loans with FHA Case Numbers ordered on or after July 14, 2008. I've posted several times about the impending change. The new policy would charge good credit borrowers less, and charge poor credit borrowers more. The idea is to make sure that FHA collects enough MIP to cover losses from the FHA insurance fund.

HOWEVER: The American Housing Rescue and Foreclosure Prevention Act of 2008, signed into law on July 30, 2008, places a moratorium on risk based FHA insurance premiums.

This means all borrowers will follow the old rule for MIP, but the FHA statutory down payment increases from 3.00% of the loan amount to 3.50%. That's right, folks, Congress is "helping" home buyers in the midst of our housing crisis by requiring home buyers to put MORE money down on FHA insured purchase mortgages.

Further, seller-funded down payment assistance programs - eg Ameridrean, H.A.R.T., Nehemiah - are BANNED from FHA beginning October 1, 2008.

Why?
Well the problem is that FHA losses have skyrocketed since seller funded DPAs were forced on HUD on July 12, 2001. Since 2000, the amount of seller funded DPAs has grown from 2% of all FHA insured transactions to 37% of all FHA insured transactions. At the same time, deliquency rates have risen from 8% to 18% on FHA loans. There is a direct correlation between the rise of seller-funded DPAs and deliquency rates over time.

The reason is that seller-funded DPAs encourage buyers to overbid for a house to allow the seller to launder down payment money through the grant provider. Higher property taxes are one consequence, but the real problem is that FHA buyers have abandnoned traditional means of providing down payments - either through savings, family gift, or community/state gov't grants. Savings demonstrates buyer commitment and discipline, family gifts demomstrate family supprt of the buyer, and community/state grants require buyers to go through home owner education and qualifying processes.

FHA is trying to anticipate and prevent losses. There is only so much money in FHA's insurance fund to cover lender losses, and if that fund is depleted then tax payers pick up the tab. FHA has three "levers" to mitigate risk: Collect more MIP from riskier borrowers, tighten guidelines, or increase statutory down payments. The risk-based MIP premiums were probably the best idea since low risk borrowers would have paid less into the fund, and higher risk borrowers would have paid more.

Instead, Congress has decided to keep MIP contributions to the FHA insurance fund the same for all borrowers regardless of risk in favor of a slight (just 0.5% less) reduction in the size of each loan insured by FHA.

Congress anticipates that since it is doubling the size of the FHA insurance fund, increasing the maximum loan amount eligible for FHA insurance, and using FHA to bail out troubled home owners that will collect a larger number of MIP premiums... hopefully enough to cover the difference on losses for loans with the slightly higher down payment requirement.

If you happen to speak with a DE FHA Underwriter, and notice the glazed eyes, odd muttering, and frazzled appearance... you'll know why. All the chages have their collective heads spinning. Speak kindly to them. They're trying their best! ;-)
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Fri Aug 1, 2008
I answered Danni's question below directly, but decided it might be helpful to share eith Trulia readers. I'm doing it in two parts due to the limit on characters per response:

Okay, let’s start with some definitions first:

FHA = Federal Housing Administration, an agency that insures loans for banks (among LOTS of other things)

Fannie Mae or Freddie Mac – Gov’t sponsored enterprises that buy loans from banks to replenish the money lent out by the bank

MI = Mortgage Insurance in general. This can be issued by a private company (just like car or life insurance), or by a Federal agency. Mortgage insurance reimburses the lender for some or all of the loan amount in the event of a loss such as foreclosure.

PMI = Mortgage Insurance issued by a private company (Private Mortgage Insurance). PMI covers 12% to 35% of the loan in the event of loss depending on the type of loan, risk, and type of property.

MIP = Mortgage Insurance Premium (Issued by FHA). MIP reimburses 100% of the loss on a loan if the loan was originated using FHA rules.

Here’s how it works:
If you take out a “conventional” loan (ie a loan not insured by the Gov’t such as FHA, VA, or US RDA), and if you have a single loan amount greater than 80% of the purchase price (or appraised value for a refinance), Fannie Mae and Freddie Mac require that the lender obtain PMI to cover possible losses.

PMI is usually “borrower paid” in the form of a monthly payment added to the regular payment for a certain amount of time… usually until the payment schedule brings the loan amount down to 78% of the purchase price (or appraised value on a refinance using the value at the time the refinance was signed). In some cases PMI is “lender paid” as a lump sum at closing… usually through profits on a slightly higher rate.

PMI rates are determined by several factors such as borrower’s credit score, type of income documentation, type of property, LTV (percentage of the purchase price taken up by the loan), type of loan. The problem with PMI is that most of the foreclosures have PMI, and the PMI companies have suffered massive losses over the past year or two. In response the PMI companies have raised premiums, reduced coverage, and otherwise scaled back the amount of risk they’ll insure. The result is some loans that meet Fannie Mae and Freddie Mac guidelines can’t be insured (such as 100% financing loans).

MIP rates are set by FHA and at present don’t consider credit score. MIP is calculated as 1.5% of the loan amount added to closing costs PLUS 0.5% of the loan amount spread out over 12 months and added to the monthly payment. Over time MIP monthly payments decrease, and MIP usually drops off after 5 years or if the loan payment schedule reduces the balance to 78% of the appraised value when the loan was taken out.

Example for FHA using 3% down payment:
Loan amount: $100,000
MIP at Close: $ 1,500
Monthly MIP: $100,000 x 0.5% = $500 / 12 months = $41.67 per month

Example for PMI using 5% down payment:
Loan amount: $100,000
PMI at close: $0.00
Monthly PMI: $68.33 using 25% coverage

With FHA you will pay a lower monthly premium but a big chunk will be added to closing costs (optionally it can be rolled into the loan on a purchase or refinance).

With PMI you’ll have no fee at closing but pay more per month… BUT the rate above is just a quote… it assumes a score of 720+, 30 year fixed rate, property in California, single family residence, primary residence, and “Approve/Eligible” findings from Fannie Mae’s approval software (which is subject to verification by the underwriter). Here’s the link to the calculator I used if you want to play with the numbers yourself:

http://www.mgic.com/is/html/ratefinder.html

Use “Monthly/ZOMP!” for “Premium Type” and 25% coverage. If the rate quote comes back with a warning, the PMI company might not issue the insurance… requiring more money down.

With MIP through FHA you’ll get the insurance for 3% down. Because lenders are tightening their guidelines – especially for low down payment purchases, and because PMI companies are tightening their guidelines as well… many folks are switching to FHA insured loans just to get MI coverage for down payments of 10% or less.

Your lender should be able to provide side-by-side comparisons of an FHA insured loan versus a conventional loan with PMI.

It’s wise to ask questions like this… to be sure you’re getting the lowest cost MI for your situation.
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Wed Jun 25, 2008
Lending answer:

The appraised value is of no importance so long as it is equal to or greater than the purchase price.

On a purchase, all calculations are made based upon contracted purchase price. Regrdless of appraised value, if you are putting down 5% of the PURCHASE price, you will finance 95% LTV and PMI will be required until (1) the amortization schedule of your loan reduces your principal balance to 78% of the original loan balance or (2) your lender agrees to eliminate PMI based upon a new appraisal after you close. In all likelihood, your lender won't agree to eliminate PMI for at least a year after you close.

Having an appraisal in hand that shows you're getting a 27.5% discount off the market value won't help in your argument. The rules come from Fannie Mae and Freddie Mac guidelines. If the bank doesn't follow the guidelines, then the bank cannot securitize your loan through Fannie or Freddie, which means they have to hold your loan in portfolio (at much higher rates than Fannie/Freddie's securitzation pools create), or securitize it on Wall St.

The major problem with PMI is that due to the foreclosure crisis, the PMI companies have suffered massive losses (and a couple nearly failed). The result is tougher rules (in many markets NO ONE will offer PMI to 95% LTV) and higher PMI premiums.

Have you considered FHA? You would need only 3% down and pay MIP (FHA's mortgage insurance premium) of 1.5% at closing and just 0.5% per year spread over 12 months. FHA originations have quadrupled in the past year largely due to the unavailability of PMI at LTVs greater than 90%.
1 vote
Andrew Adams, , 01915
Fri Aug 1, 2008
The one distinction I would make is the 3%-3.5% down payment is actually a minimum cash investment requirement.

Forget down payment assistance programs for a minute. To purchase a home with an FHA loan you will need between 5-6%. Hud currently requires a minimum of a 3% cash investment from the buyer. That cash investment can be a gift from a family member and prior to 10/1 those funds can come from the seller funded gift programs (Ameridream e.g).

The change is basically requiring the borrowers to have more real cash in the transaction.
0 votes
Andrew Adams, , 01915
Thu Jul 31, 2008
Mip and MI are the same FHA requires UFMIP (up front Mortgage insurance premium) that is financed in. Increases the loan amount by 1.5% in most cases. However that has chnaged a little bit with the risked base pricing changes and credit is now a factor.

The LTV is based off the lower of the appraised value or purchase price.

Not sure why the 100% is being mentioned, but in MA the state bond agency still does offer 100% financing provided you meet the income guidelines. A Proprty in a declining market is not an issue with this program.
0 votes
Julie, , Chattanooga, TN
Thu Jul 31, 2008
Danni,
Right now 100% loans are available using the down payment assistance programs still available.
Meaning you can get into an FHA loan right now with -0- down. Congress however has just passed a bill that will go into effect in October requiring buyers to pay 3.5% down. The Georgia Dream Homeownership Program will assist buyers with down payments and reduced rates.
0 votes
Danni Mcmann, Home Buyer, Sacramento, CA
Thu Jul 31, 2008
Hey all - I am in a similar situation to the person submitting this question. We are putting 5% down on a short sale property. The total loan will be around 73% of the current APPRAISED value (as of 6/15/08) -- though I am sure that value is decreasing every second :). Our credit and income are perfect, but we are using an FHA loan because we only have 5% down and our lender says there is basically no such thing as a 95-5 right now.

So, the first part of River's answer below is what I have been told before - that basically our LTV is 95% regardless of the appraised value, and it will take 2 years before we can think of getting PMI canceled.

However, I was hoping River (or anyone else who knows :) ) could elaborate more on the last point regarding FHA. Does this mean that if you use FHA you basically pay MIP rather than PMI - and that MIP is generally a lower premium than PMI?

Thanks...
0 votes
Cameron Piper, Agent, Forest Lake, MN
Wed Jun 25, 2008
Vanessa,

I appreciate your response however if you reread the post you will note that the property is indeed 72.5% of APPRAISED value. FYI for the future, corrections should probably be sent directly to the person by email rather than on the public forum. It alows us to focus our posts more on the question at hand rather than conversing back and forth. Cheers.

Cameron Piper
0 votes
Vanessa Riff…, , 01450
Wed Jun 25, 2008
In as much as I agree in theory with your answer Cameron, the LTV (loan to value) ratio isn't based on the Assessed value of the property, but rather the APPRAISED value of the property. Your lender will send an appraiser out to determine the "fair market value" of your home in order to support to the bank that their investment in lending you the money is a sound one. The assessed value is based only on the town's need to raise revenue via taxes. Tax assessors almost never see the true value of a property - - because they never go in them, or even rarely do they walk the land. If the property doesn't Appraise for the amount of your offer to purchase price, then the bank won't commit to the loan. Disclaimer here - - I am not a lender or tax advisor in anyway. Due to the market downturn in the past couple of years, we are beginning to see a lot of properties selling for less than the assessed value because the towns only reassess every 3 years. My thoughts are than when the towns reevaluate property values in their next rotation, you'll see a lot of attempts in towns to drastically increase their tax rates because the current values that are assessed are out of sync with the actual market. Therefore, the Actual Fair Market Value will be determined by the Appraiser for your Bank, and if they value the property at at the price which you have offered to purchase it for, then the value will still be 100% and your loan will still be for 95% of that appraised value - - regardless of what the assessment is. Now - - lets imagine the appraisal comes in at the Assessed value or even up to 80% of the assessed value - - then in fact your loan should be adjusted be adjusted and the PMI eliminated if you are borrowing any less than 80% of the LTV. Ask your lender for a copy of the Appraisal - - you pay for it - - you have a right to a copy of it. Then ask him to adjust the PMI.

Vanessa Riffelmacher
Graduate of the Realtor Institute
REMAX Colonial
978-877-8087
0 votes
Cameron Piper, Agent, Forest Lake, MN
Wed Jun 25, 2008
If your mortgage will be 72.5% of the appraisal, your LTV is 72.5% regardless of downpayment because the mortgage amount is calculated after the downpayment is applied. I would talk to your loan officer to confirm this but you shouldn't need to pay any PMI on this loan. I hope that helps.

Cameron Piper
Web Reference:  http://www.campiper.com
0 votes
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