Private Mortgage Insurance (PMI): Protection for Lenders

by caf46 » Mon Mar 23, 2009 08:54 pm

If you have bought a home with a loan more than 80% of your home's value then your lender will require you get an extra insurance i.e. the private mortgage insurance. To put it simply if you are a buyer with down payment less than 20%, you will usually be required to pay PMI.

What are the benefits of PMI?

PMI has its own benefits. Take a look:

It protects a lender from any loss that may occur due to a default in loan by a borrower.
It enables a prospective borrower to have greater access to homeownership even if he has less cash on him.
It allows an individual to purchase a home with as less as 3% - 5% down payment.
You do not have to wait till you can save enough money in order to buy a house.

What are the new PMI requirements?

There is a new federal law, The Homeowner's Protection Act (HPA) of 1998 that requires revelation regarding PMI for loans. These disclosures are required of lenders against PMI for loans secured by the consumer's main residence purchased before, on or after July 29, 1999. There are also provisions for automatic termination of the Private Mortgage Insurance as well as cancellation requested by the borrower.

What does The Homeowner's Protection Act (HPA) of 1998 cover?

Normally, The Homeowner's Protection Act (HPA) of 1998 is for mortgage transactions for home buyers purchasing homes after July 29, 1999. However, it also applies to the loans obtained before July 29, 1999. VA and FHA are not covered under HPA. It has different requirements for 'high-risk' loans.

Is there any way you can avoid PMI?

Of course and there are more than one way. Take a look:

Paying higher interest: If you accept a higher interest rate on your mortgage loan, your lender may waive the Private Mortgage Insurance requirement. This increase in rate depends on the down payment that you pay. It generally ranges from 0.75% to 1%. This mortgage interest is tax deductible.

Opting for an "80-10-10" loan: Basically this plan involves 2 loans and a 10% down payment. Private mortgage insurance rates equaling 80% of the sale price finances 90% of the loan amount. The remaining 10% of the sale amount is financed by a second mortgage. Ideally this 2nd mortgage has a higher rate of interest but since the loan amount is only 10% of the total amount, the combined interest paid monthly is still lower than the amount to be paid if one mortgage pays for one mortgage insurance. Moreover, the mortgage insurance is tax deductible and this is an added advantage.

How does one cancel or terminate PMI?

PMI or Private Mortgage Insurance cancellation can be made in a few simple ways. They are:

Appraisal: Your private mortgage insurance cancellation depends on the value of your home. If the value of your home has risen recently then the mortgage insurance may be terminated. The equity in your home needs to fall below 80% loan-to-value-ratio as required by your lender for it to be eligible for cancellation. Your lender will need to see a valid home appraisal before he can terminate the mortgage.

Remodeling: If you have made certain improvements in your home, it means that you have automatically increased the market value of your home. Hence the above mentioned principal also applies here.

Paying your mortgage: If you can manage to bring your loan-to-value-ratio below 80% then you do not need to pay the PMI. Hence, small monthly payments can make a significant amount of difference.

Opting for an "80-10-10" loan: Refer to the section under avoiding PMI.

Automatic cancellation: As you reach 20% equity in your mortgage you have the automatic right to request for private mortgage insurance cancellation according to The Homeowner's Protection Act (HPA) of 1998. Moreover, lenders are instructed to automatically cancel PMI as soon as the borrower reaches 78% of the loan-to-value. You may opt for a private mortgage insurance calculator to help you better with your loans.

Private mortgage insurance is a boon for such buyers who cannot afford a large 20% down payment. This is to protect your lenders, and hence you, from a default that you make on your loan. So if you are considering buying a house with a homeowner's loan, be prepared to get PMI since your lender will require you to have one.

The homeowner pays the premium but the Lender holds the policy. In the event the homeowner is foreclosed on and the PMI company pays the lender can the PMI company sue the homeowner for their lose?

Total Comments: 39

Posted: Tue Mar 24, 2009 01:33 am Post Subject:

Yup. This was discussed a short time ago. As mentioned, PMI is paid by the home owner but it's coverage for the mortgage company should the owner default. The PMI carrier then assumes the mortgage companies right of recovery against the home owner.

Posted: Tue Mar 24, 2009 06:39 am Post Subject:

Okay, the PMI company indeed can sue the homeowner for their loss. If the value of the property goes down after appraisal, then the PMI company would sue the owner for the amount they have paid to the lender. Let me explain with an example,

Suppose the loan amount is $90k but owing to the market condition the property value drops to $80k. The PMI company may then try to recover the loss from the owner of the property.

Hope it explains.

Posted: Wed Jun 17, 2009 09:26 pm Post Subject: PMI insurance

Can the PMI company actually collect on the debt then? I was issued a summons indicating if i don't respond the court may enter an order, judgement, or decree against such party either by default or hearing evidence. What can the legal system do to me? Will i have to pay?

Posted: Wed Jun 17, 2009 11:12 pm Post Subject:

What can the legal system do to me? Will i have to pay?

You _really_ don't want a default judgement against you. This means you did not defend yourself in any way. Whatever the PMI carrier can convince the judge you owe, you owe.

What they can do depends on the state where you live. In Utah they can garnish your wages so that you make little more then minimum wage until it's paid off. Some states don't allow this. If nothing else, this will remain on your credit history for a long time. It might be able to be renewed longer then 7 years. This type of mark on your credit history would probably result on loss of better jobs, denial of credit and certainly much higher interest rates. You'd probably not be able to buy another house and might have a hard time finding places to rent.

If you can afford it, you _really_ want to look into speaking with an attorney on this matter.

Posted: Thu Jun 18, 2009 04:05 am Post Subject:

Excellent responses. Most people think that just because PMI stands for "private mortgage INSURANCE" that there's actually insurance involved for the buyer. That's 'cuz I've never seen a lender fully explain pmi to a borrower once in my life.

The only "insured" in a PMI contract is the lender; they get paid off in the event of default on the part of the borrower. It's more like a bonding and surety contract, which most people don't really understand either. Bonding is really just an extension of credit, and so is PMI to a great extent. In the end game, the borrower is responsible for any balance remaining on the mortgage loan, including any court costs/attorney fees, etc. incurred on the part of the mortgage company.

Not only do I agree that you don't want a judgment on your credit report, I would say that it's really important that you get on this NOW and reach a settlement with the creditor immediately. Have you discussed your options with them? They're not much different than most creditors, they might even work with you on a payment option depending on a number of variables. If it hits your credit, you'll drop 75-100 points by the next reporting period, and possibly more depending on other factors. With the new FICO scoring methods, this'll hit you harder, so don't let it get to that point.

InsTeacher 8)

Posted: Thu Jan 07, 2010 08:01 pm Post Subject: Issued a summons by PMI mortgage insurance company

I was also issued a summons by the mortgage insurance company telling me I owe them over $31,000! Will I be able to fight this in court? I am in a class action suit against countrywide for the horrible loan I was in which RESULTED in my foreclosure which RESULTED in the insurance company paying Countrywide which RESULTED in the claim against ME!!! That somehow seems extremely unfair. The attorney general is stating that those of use in this lawsuit were WRONGED by Countrywide. I do not feel that I should owe anything to this mortgage company.

Posted: Thu Jan 07, 2010 09:17 pm Post Subject:

Will I be able to fight this in court?

That amount of money puts you in District Court, or at last more then small claims court. I'm my strong recommendation that you obtain an attorney to defend yourself. Of course, this will cost you money unfortunately. It's my layperson's opinion that you'd want to bring all those other parties (countrywide, etc) into the suit against you, as co-dependents. This makes them provide an attorney to defend themselves but brings more people to the table. Again, an attorney would know all of this stuff.

I imagine if a judgement was obtained against you, and you won the case against Countrywide, that you could then file a counter suit against Countrywide for the loss you suffered from the judgment. Again, an attorney would be needed. But in that case their might some punitive damages that the attorney could collect so you'd not need to pay out of your pocket.

Posted: Fri Jan 08, 2010 12:33 pm Post Subject:

Most people think that just because PMI stands for "private mortgage INSURANCE" that there's actually insurance involved for the buyer. That's 'cuz I've never seen a lender fully explain pmi to a borrower once in my life.

Agreed. I see this very often and even see many attorneys struggle with it as well. When we bought our first house, I could not get the lender to explain it either. They had 5 or 6 people try to do it, and everyone of them ended their lecture with "I maybe wrong, so don't quote me on it."

Posted: Tue Jan 26, 2010 12:00 am Post Subject: PMI not canceled at 78%

"The Homeowner's Protection Act (HPA) of 1998. Moreover, lenders are instructed to automatically cancel PMI as soon as the borrower reaches 78% of the loan-to-value."

Isn't this actually when the bank has the loan scheduled to reach 78%? I have paid down my mortgage to 78% by paying extra principal and it isn't automatically coming off. I have also read others have done the same and have had to pay fees to get the PMI off. If true, this sounds like it violates the spirit of the law.

Posted: Tue Jan 26, 2010 12:12 am Post Subject:

Isn't this actually when the bank has the loan scheduled to reach 78%? I have paid down my mortgage to 78% by paying extra principal and it isn't automatically coming off

If I remember my math correctly, this is when the home owner can request the PMI be dropped (you need to find out from the mortgage company what they require, such as an appraisal). It's not _required_ until the loan is at 80%. I hope I don't have that backwards.