On Friday, I blogged about using Lump Sum or Single Payment PMI to Make Transactions With Low Appraisals Work.
And I got a ton of feedback, so I am following up on it.
In my blog, I shared an example of a home with a $670,000 purchase price and a $35,000 appraisal shortfall (with sellers unwilling to budge on the price).
The buyers intended to put down 20% to avoid PMI, but after making up the appraisal shortfall, they no longer had enough for 20% down.
So, we proposed that the buyers put less than 20% down (about 16%) and then finance their lump sum PMI by adding it to their loan.
The lump sum PMI payment was only $2,400, and it only added $16 per month to the payment – so the buyers were delighted.
Can Sellers Pay Lump Sum PMI in the Form of Credits?
This was one of the first questions I got in response to the blog from a savvy agent, and the answer is emphatically YES! I was remiss for not saying as much.
How Do I Explain This to My Buyers?
This was another question, so I thought I’d explain PMI quickly.
What’s PMI?
PMI stands for Private Mortgage Insurance. It’s called “private” mortgage insurance to distinguish it from the government-sponsored mortgage insurance that FHA requires.
Lenders require it when loan-to-value ratios exceed 80% – or when down payments are less than 20%.
80% is not an arbitrary number, as there is much data showing that default risks rise significantly when down payments are under 20%.
How Do PMI Providers Charge?
PMI rates or costs are based on the loan-to-value ratio – with different rates for each tranche: 80% to 84.99%; 85% to 89.99%; 90% to 94.99%; and 95% to 96.99%.
PMI rates are also based on credit scores and the use of the property (e.g. primary vs. second home).
There are numerous prominent PMI providers, and lenders sometimes shop among them for the best rates for borrowers.
How’s PMI Paid?
PMI can be paid in a variety of ways including: (1) monthly payments; (2) lump sum or single payments upfront; or (3) a combination of lump sum and monthly payments.
Lenders can also pay for PMI with what is called “LPMI” or Lender Paid Mortgage Insurance; lenders simply offer a higher rate and then use the additional yield premium to pay for the lump sum.
In the scenario I share above with the $670,000 purchase price, the alternative to the $2,400 lump sum was a monthly payment option of $112 per month.
Note too that the payments would have been much lower if the borrower’s credit score was higher.
And finally, lump sum PMI is not refundable if borrowers refinance after they purchase; the higher interest rate that comes with LPMI is permanent (which is why we don’t push LPMI that often); but monthly PMI is not permanent – if borrowers pay their loan down to 80% of original purchase price and values have held.
What To Say To Buyers?
So – agents should explain the basics of PMI to buyers and then explain the risks of an appraisal shortfall based on the comparable sales available.
Agents should then have their buyers reach out to their lender to discuss what the cost of lump sum PMI might be based on the credit score and potential LTV parameters the borrower is facing.
Borrowers can then decide if they want to waive their appraisal contingency if this is prior to an offer being made. If this is after buyers are in contract and after an appraisal comes in low, buyers can then decide if they want to use the lump sum technique to help cover their appraisal shortfall.
OR.. they can ask sellers to pay for the PMI.
