Recently, I blogged about why Private Mortgage Insurance is “Awesome,” pointing out why its stigma from the 1990s is so underserved.
One of the many benefits of PMI is using it to help cover appraisal shortfalls, and I wanted to elaborate on that in this blog.
$900,000 PURCHASE APPRAISES $100,000 UNDER
Assume the following:
Purchase Price: $900,000
20% Down Payment: $180,000
Desired Loan Amount: $720,000 (80% loan-to-value loan)
Appraised Value: $800,000 ($100,000 UNDER contract price)
In this scenario, if the buyer wants to keep her 80% loan-to-value loan, she will have to LOWER her loan amount to 80% of the appraised value, or to $640,000.
MUST BRING IN $80,000 EXTRA TO COVER APPRAISAL SHORTFALL
This would require her to bring in a $160,000 down payment (20% of $800,000) and an additional $100,000 to cover the appraisal shortfall, assuming the seller will not come down in price (which is likely in this market). Note: Because the appraised value is only $800,000, her 20% down payment drops by $20,000. So, her net increase in “cash to close” is only $80,000.
Because buyers often do not have an extra $80,000 to $100,000 lying around to cover appraisal shortfalls, single premium PMI can be employed to offer the same financing the borrower would have obtained if the appraisal had come in at contract price.
LUMP SUM PMI INSTEAD OF COVERING APPRAISAL SHORTFALL
The borrower can simply keep her loan amount at $720,000 (with the same interest rate and terms) and NOT have to bring in any cash to cover her appraisal shortfall – if she just purchases single premium PMI.
For strong borrowers, single premium or lump sum PMI could be purchased for under $6,000! And remember, with single premium PMI, there are no monthly PMI charges.
Single premium PMI will be much higher for weaker borrowers (with lower credit scores for example), but it still effectively saves borrowers tens of thousands if they do not have to bring in the appraisal shortfall.
In any case, single premium PMI is often a far cheaper way to go when it comes to “total cash to close.” It is even cheaper when loan-to-value ratios drop under 85%.
And finally, in some markets sellers may be willing to help cover the cost of the single premium PMI in an effort to keep transactions alive. It is much easier to get a $6,000 PMI credit than it is to get a $100,000 price reduction!
NOT ALWAYS FOR JUMBO
I should add though that this doesn’t always work for jumbo transactions; many jumbo lenders have stricter LTV guidelines and often require 20% down payments no matter what.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
