Mortgage insurance and property values

September 21st, 2010

A growing proportion of mortgage applications are for loans that require mortgage insurance because of a high loan-to-value. This puts mortgage insurance companies into a powerful position as to deciding who does and who does not get a new mortgage.

Mortgage calculators compute payments, cash to close and loan amounts based on what you input. The calculators use math formulas and the numbers always work out the same. Underwriting for your loan is not just a math formula but also a subjective analysis of the property you are purchasing or refinancing. If your mortgage requires mortgage insurance, until your credit package and appraisal are underwritten and approved by the PMI underwriter your loan to value is uncertain.

Perhaps the biggest advantage of using FHA financing for your new home loan or mortgage refinance if you have a low down payment or little equity is the consistency of underwriting. Since the loans are federally insured with uniform underwriting standards there is some uniformity from lender to lender in providing mortgage approvals. Not so the case for private mortgage insurance.

Private mortgage insurance

Private mortgage insurance, or PMI, is required on conforming loans, those from Fannie Mae or Freddie Mac, that exceed 80 percent of the value of the property. If your mortgage amount is $245,000 and the purchase price of your new home, or value of your current home for a refinance, is $280,000 your loan to value is 87.5 percent, the mortgage amount divided by the property value. If this is the case with a conventional mortgage you will require mortgage insurance.

There is not just one mortgage insurance company that insures all conventional mortgages, as there is with FHA mortgages — in which case the insurance company is the federal government. Rather, there are several different companies that offer PMI to lenders. Each of these PMI companies has its own rules and guidelines as to what mortgages it will and will not insure. Some do not insure in declining market areas; others do not insure condominiums with high loan to value ratios; others will not insure borrowers with credit histories showing severe delinquencies in the past.

Closer scrutiny

One factor that has become common to all mortgage insurance underwriters has been scrutiny of the subject property and the appraisal. While guidelines for underwriting income to debt ratios and assets to close are pretty standard, guidelines for underwriting the collateral, the property, your home, are not so standard. And this is creating big issues for many borrowers and sellers across the country.

Input your information in a refinance calculator or prequalification calculator and you determine a mortgage amount and monthly payments. The calculator does not question the value of the property you have entered. Once you submit your new home loan or refinance mortgage application, an appraisal will be ordered for the property. When the appraisal is complete it will be submitted to be underwritten, or approved.

If your mortgage application requires mortgage insurance, an underwriter from the PMI company will underwrite, or review, the appraisal of the property to determine if it is adequate and properly done and in his or her opinion accurately defines the value of the home you are buying or refinancing. This is the most critical part of the PMI underwriting process.

PMI may be for less than appraised value

Mortgage insurance is almost solely a collateral decision for the PMI companies. Mortgage insurance does not insure the complete loan amount but a percentage of the mortgage. The percentage that is being insured depends on the loan to value and therefore the appraised value of the property. If the sales price is $280,000 as indicated above, but the PMI underwriter feels the appraiser has over-valued the property and cuts the appraisal to $270,000, the lower value reduces the PMI company’s exposure to any potential losses in the future.

The good news regarding PMI and value consideration is that many areas of the country are seeing their median home prices rise. This is removing the designation of “declining market area” from many regions and cities which in turn is loosening some of the underwriting guidelines for property values in those areas.

Continue to use a refinance calculator or prequalification calculator for your mortgage decisions, but remember if you are considering a mortgage that will require PMI the importance of a strong appraisal.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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