I am beating the Private Mortgage Insurance (PMI) dead horse again, at the suggestion of an agent who inspires a lot of my blogs (thank you, Jeff Weissman).
In any case, he suggested explaining PMI options up front to clients who might want to make offers with no appraisal contingencies.
This of course is a great idea, but with a HUGE CAVEAT: BEWARE OF JUMBO!
On the conforming front, PMI is always a great way to cover appraisal shortfalls.
Example: Borrower intends to put down 20% on a $600,000 purchase. The appraisal, however, comes in at $540,000 and the seller won’t budge. Instead of putting down 20% of $540,000 and then also bringing in the $60,000 appraisal shortfall, the borrower can instead just put down 10% of $540,000 and obtain single payment PMI to keep her payment about where she wanted it. She will still have to cover the $60,000 shortfall, but her total out of pocket cash to close will be about the same.
On the jumbo front though, it is not that simple.
This is b/c most of our best jumbo investors don’t allow loan-to-value (LTV) ratios over 80% – with or without PMI.
HIGH LTV JUMBO = MUCH HIGHER RATES
There are ample jumbo options for LTV ratios over 80%, but they come with either: (1) much higher rates; or (2) much more stringent qualifying criteria, e.g. much higher reserve requirements.
We are quoting no points jumbo loans right now as low as 2.625% – from our best jumbo investors.
But, if an appraisal comes in low and the buyer does not have the cash to cover the shortfall, our best investors are no longer a viable option.
Buyers in that situation have to take a loan with rates as much as 1% HIGHER (for loans over 80% LTV), or they have to take a loan with a 1/2% higher rate and PMI.
Either way, these buyers will be hit with a much higher rate and/or payment than they expected.
Making the situation more complicated is the fact that the higher payments might knock the borrower out of qualifying range.
And finally – the jumbo lenders that do offer PMI or high LTV financing, often cap their loan amounts at $1 million or $1.5 million.
CONCLUSION: Switching to higher LTV loan options remains a solution for jumbo borrowers who want to waive appraisal contingencies, but agents and buyers need to discuss the implications with their lender so there are no surprises.
TWO FINAL POINTS:
- Single Premium PMI Can Be Financed. This is something our MGIC (PMI company) rep reminded me of, but lump sum PMI payments can be added to the loan amount or “financed,” making them that much more palatable.
- We Don’t Usually Recommend Single Premium PMI. I have been recommending single premium or lump sum PMI for appraisal shortfalls only. We typically do not recommend it though b/c buyers will be out of pocket the entire amount of up front PMI no matter what (with no hope for a refund) even if their home appreciates significantly or if they sell or refinance in the near future.
Again – all of this should be discussed with the buyer’s lender.
Founder/Broker | JVM Lending
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