Confused about PMI...and how to avoid it...?

Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes

Hello all,

So...as I am researching the topic on PMI, I am coming up with conflicting responses. I am looking at a 3.5% (30 year) owner-occupied FHA loan for a duplex in Dallas.

From what I understand...is that, you will have to purchase PMI for loans for anything less than 20% down. I also read that some rules changed and now the PMI can NEVER be removed (even after 80% LTV is reached)

Is this correct?...and how much is PMI costing?

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

12y

FHA has MIP now, on all loans, and it stays forever. Conventional hasn't changed.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
FHA has MIP now, on all loans, and it stays forever. Conventional hasn't changed.
2 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Wayne's on it! Mortgage Insurance Premium on FHA vs Private Mortgage Insurance on conventional....why different, I have no idea! Government.

You may have been reading that the first year's premium is non-refundable, ie, refinancing. I believe PMI can drop off at 78% LTV, just under 80% now. Seems I read somewhere PMI will drop off at 75%, may be unique to a program. I need coffee! :)
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James Mudd
OP
Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
12y
@Wayne Brooks @Bill Gulley

...thank you for the responses. So, the best way to get out (if you have an FHA) is to refinance to a conventional as soon as possible...?

How much does MIP cost per month..?
1 Reply
Justin E.
Tucson, AZ · Member since 2013 · 30 posts · 8 votes
12y
I believe it is 1.5% of mortgage amount initially (added to loan), and .5% of the amount loaned per year. Or about $42 a month per $100k financed.
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James Mudd
OP
Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
12y
Okay thanks @Justin E.

That's not too awfully bad...so is the best strategy to refinance out of the FHA into a conventional, so you can eventually drop the mortgage insurance..?
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Duncan Taylor
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
@James Mudd,

When you refinance you will have to be under 80% LTV to get the new conventional loan without PMI. If you buying using FHA financing to get in with a very small down payment, it will be MANY years before you get down to that LTV.

Which begs the question, why are you buying with FHA?
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James Mudd
OP
Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
12y
Duncan Taylor ...FHA so I don't tie up a lot of money on one property...also, it won't take me "many" years to get under 80% LTV...just using leverage as best I can.
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Duncan Taylor
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
Originally posted by @James Mudd:
Duncan Taylor ...FHA so I don't tie up a lot of money on one property...also, it won't take me "many" years to get under 80% LTV...just using leverage as best I can.

Look at an amortization table, it will take more than 10 years if you make just the normal payment to get under 80% LTV if you put 5% or less down on a 30 year FHA loan.

If you are counting on appreciation getting you there faster, I wish you all the luck in the world.
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
I have a $175k loan on my primary and my FHA MIP is $165 per month.

The MIP will never fall off because of appreciation. You need to reach 78% LTV (And that "V" is the value from when you purched the home). So in my example, I bought my home for $180k, so my MIP won't fall off until my principal balance hits $140,400.

Check with your CPA, but times have changed in the FHA MIP world. My (NON-CPA) understanding is this:

2 years ago, you could:
-Write off the up front mortgage insurance premium
-Write off the monthly mortgage insurance premium
-You were "grandfathered" into these rules if you bought your home using FHA back then, so you can continue to write off the monthly premium
-MIP falls off at 78% of LTV

Using FHA today:
-Up front premium no longer tax deductible
-Monthly MIP no longer tax deductible
-MIP NEVER goes away, regardless of LTV

Again, I suggest you consult with a licensed tax advisor to confirm all of this is precisely accurate.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
@Scott E. Not true. The LTV , 78%, IS determined by an appraisal, which borrower pays for, not the original purchase price (maybe on the first year or so).
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Christopher Giannino
Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
12y
James Mudd I am very curious about this as well. As an investor, who is looking to purchase more homes in a short amount of time, you would think putting less down might be better. This could allow for a higher ROI as well since as an example you put 5,000 vs. 30,000. One thing is your payments with an FHA loan will be higher due to putting less down and having the PMI. As others have mentioned, the PMI calculation is .005 for the amount your financing. I read this figure online last night. The only thing to keep in mind is that if your banking on refinancing that means the house has to have appreciation. With no appreciation and a drop in the market, that means you would have to cover the "gap" and then put the 20% down. I always like to be conservative and assume the worst. I hope this helps!
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
@Wayne Brooks I just talked to my lender(wells) about this last week. I've been paying additional to principal, plus my house has seen 25% appreciation since I bought it, so I was optimistic that I could get the MIP removed. My LTV based on today's value is ~67%. They said that doesn't matter. Per their standards, MIP is sticking with me until I get to 78% of the original appraised value at time of purchase.
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
@Christopher Giannino Don't forget that you can't use FHA for investment properties that you never intend to occupy. They only can be used on owner occupied homes.
1 Reply
Christopher Giannino
Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
12y
Scott Swink you are right. I'm still new to REI and kind of forgot about that part. So if he was going to live in part of the duplex and rent out the other side would that qualify for FHA loans? But that is a very important part that I missed. Thanks.
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
@Christopher Giannino Yes, living in half the duplex and renting the other half would consider you an owner occupant.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
The ONLY benefit now to FHA is the low down payment. You are getting crushed now by upfront MIP and ongoing annual MIP.

FHA came on strong when conventional loans took an absolute beating with the 80/20 loans ZERO DOWN. Once losses started creeping up and companies went out of business conventional changed from nothing down to 10% or more etc.

Buyers conditioned to nothing down didn't like that so FHA which at the time was much more healthy and solvent said you can get in for 3 percent down etc. People loved that and the insurance premium was dirt cheap. This last down cycle FHA took severe losses of about 1.7 billion ending it's fiscal year in Sept. of 2013. Now FHA has raised to 3.5% down and is looking to go to 4% soon. They also have raised MIP upfront and ongoing numerous times. They are making the current people pay for lending sins of the past for borrowers who were foreclosed on. They see this as a way to become solvent again. FHA is also easier on past collections , less down on lower credit scores, and the loan is assumable to qualified borrowers. Being able to drop MIP went away for what most people use FHA loans for in April of 2013. If you didn't have a case number assigned by then you were SOL.

Here are the insurance figures:

http://www.fha.com/fha_requirements_mortgage_insurance

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1 Reply
Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
Originally posted by @Bill Gulley:
Wayne's on it! Mortgage Insurance Premium on FHA vs Private Mortgage Insurance on conventional....why different, I have no idea! Government.
You may have been reading that the first year's premium is non-refundable, ie, refinancing. I believe PMI can drop off at 78% LTV, just under 80% now. Seems I read somewhere PMI will drop off at 75%, may be unique to a program. I need coffee! :)

@Bill Gulley

@Bill Gulley - FHA loans no longer have the MIP go away even after the property has had the loan paid down below the thresholds you mentioned that are typical in conventional financing. FHA borrowers would have to do a refi to get out of that loan to get rid of the MIP.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
Originally posted by @Scott E.:
@Wayne Brooks I just talked to my lender(wells) about this last week. I've been paying additional to principal, plus my house has seen 25% appreciation since I bought it, so I was optimistic that I could get the MIP removed. My LTV based on today's value is ~67%. They said that doesn't matter. Per their standards, MIP is sticking with me until I get to 78% of the original appraised value at time of purchase.

@Scott E.

@Scott E. - read your loan docs. Used to be that you could get an appraisal to show that the LTV was below the stated threshold, and the PMI would be removed. Maybe that has changed.
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Daniel Shults
Real Estate Investor · Mount Washington, KY · Member since 2013 · 21 posts · 1 vote
12y
FHA MIP is 1.35% The UFMIP is 1.75% The word around the lending market this year is that FHA will change the MIP down to a lower percent. We are seeing a lot of changes with the new "QM" Qualified Mortgage changes that have been in place since Jan. 10th. So look for a lot of lenders to start tightening the ratios and limiting the approvals they give out to borrowers! Good Luck!
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Originally posted by @Scott E.:
@Wayne Brooks I just talked to my lender(wells) about this last week. I've been paying additional to principal, plus my house has seen 25% appreciation since I bought it, so I was optimistic that I could get the MIP removed. My LTV based on today's value is ~67%. They said that doesn't matter. Per their standards, MIP is sticking with me until I get to 78% of the original appraised value at time of purchase.

Scott, that is Not a conventional loan requirement-not Fannie or Freddie.

2 possibilities: 1) that is a WF specific overlay 2) your loan officer needs a drug test Or 3). This may be a portfolio loan, not Fannie/Freddie.
1 Reply
Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Clarification: FHA loans originated after July-something, 2013, can never have the MIP removed for the life of the loan. Loans before that are under the old 80% LTV rules.
1 Reply
Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
Just to point out why the "78% of original appraised value at time of purchase" is unfair - to both lender and borrower. Say you remodeled kitchen and baths, those definitely should increase the value of the house should the lender have to foreclose. Then of course one could have gutted kitchen and baths expecting to remodel but run out of money before getting it done.
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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
@Wayne Brooks I got a laugh out of your comment about the loan officer needing a drug test. Let me just say that I HOPE that's the case and I still have a shot at getting it removed...

Here is where I think we might not be seeing eye to eye. Fannie and Freddie are GSE's(government sponsored entities). FHA is government funded and operates under a different set of criteria.

Your assessment may be accurate speaking to GSE backed loans, but the lending terms and regulations aren't the same as FHA backed loans.

@Steve Babiak

@Steve Babiak Will do. Like Wayne said, maybe I just got a bad MLO when I called Wells.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by @Steve Babiak:

Originally posted by @Bill Gulley:
Wayne's on it! Mortgage Insurance Premium on FHA vs Private Mortgage Insurance on conventional....why different, I have no idea! Government.
You may have been reading that the first year's premium is non-refundable, ie, refinancing. I believe PMI can drop off at 78% LTV, just under 80% now. Seems I read somewhere PMI will drop off at 75%, may be unique to a program. I need coffee! :)

@Bill Gulley

@Bill Gulley - FHA loans no longer have the MIP go away even after the property has had the loan paid down below the thresholds you mentioned that are typical in conventional financing. FHA borrowers would have to do a refi to get out of that loan to get rid of the MIP.

Hmmm, I don't think I said that. I said PMI can drop off, not MIP, I know, it's confusing. :)
1 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by @Steve Babiak:
Just to point out why the "78% of original appraised value at time of purchase" is unfair - to both lender and borrower. Say you remodeled kitchen and baths, those definitely should increase the value of the house should the lender have to foreclose. Then of course one could have gutted kitchen and baths expecting to remodel but run out of money before getting it done.

Steve, in that case you show the hard costs of improvements, might support that with pictures, they can bite off on that, most likely though you just get another appraisal.

And yes, I had a few rehabs handed to me, it can go the other way too. :)
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