Many of Henderson’s would-be first time home buyers are stopped short when they come up against the need to raise the initial deposit. But just because you don’t have a hefty down payment, it needn’t mean you can’t own your own home. You can still purchase a house with less than a 20% down payment if you are otherwise qualified—that is, if you take advantage of something called private mortgage insurance (“PMI”).
The reason there is a market for private mortgage insurance in Henderson is because lenders face an increased risk when they issue a loan with a low down payment. The simple fact is that the less money a home buyer invests in a property, the greater the possibility that he or she will choose to simply walk away. Someone with 5% equity in a home has a lot less invested than had they plunked down 20%—so if anything goes wrong, it’s proportionately easier for them to just hand the keys to the bank. Mortgage insurance covers the lender in such a default.
The cost of private mortgage insurance in Henderson comes in the form of monthly premiums in an amount set by the PMI issuer. The amount charged depends upon the loan-to-value ratio of the property, factored in with the borrower’s credit score. The insurer guarantees the difference between a 20% down payment and the amount put down by the borrower. For instance, if the borrower puts a 15% deposit on a $200,000 home, but then defaults, the PMI provider would cover the lender for $10,000—the difference between a standard 20% down payment (here that would have been $40,000) and the amount actually made as a down payment ($30,000).
The obligation to continue making PMI policy payments ends once the principal balance on the mortgage falls below 78%, since the borrower’s stake in the property will have risen to 22%—a touch above the 20% threshold. Borrowers can reach this benchmark early by choosing pay extra on their home’s principal balance or by making improvements that result in raising the value of the property: another way to improve the LTV. That route requires a request for PMI cancellation and borrower’s payment for an updated property appraisal (the appraiser will be named by the insurer).
For prospective buyers who are otherwise fully qualified — but for one reason or another can’t supply a 20% down payment — private mortgage insurance makes homeownership possible. No matter what your financial profile, starting the pre-qualification process is your first step. Contact me to get the ball rolling this spring!