Real Estate Home Mortgages/PMI

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Question
Hi Mr. Forster: My wife and I are purchasing a fix-up home for $175,000. It needs about $50,000 in repairs. The mortage broker we spoke to got our loan pre-approved. But she told us that because it needed so much work, it did not qualify for a conventional loan, we would have to pay PMI even though we are putting down 20% cash as a down payment. Moreover, she told us that the PMI payment must be paid as a single payment premium upfront at closing, which comes to around $3000- in addition to other closing costs. She insists that it is a requirement for getting the loan. I always thought that at 20% equity, the PMI is no longer required, so her proposal doesn't seem right.  If we do pay this PMI ufront fee, would it be prorated if we paid off the 30-year-mortage in a year or two and thus be refunded the unused portion of the 30 year term?  What are your thoughts on this?   thank you

Answer
Marc -

The purchase transaction you are in is described in the mortgage industry as "non-conforming", due to the large amount required for necessary repairs. That means that you cannot get a "conforming" loan and be free of the PMI requirements; instead, you have to comply with the non-conforming lender's requirements, and they include a single-premium PMI.

The single-premium PMI has been a standard requirement for FHA loans for decades; now more and more lenders require it on non-FHA mortgages. In your case, despite the 20% down payment, your lender sees the $50,000 in repairs as an excessive risk, hence the PMI requirement. Had the condition of the property been better, the lender would have considered your $35,000 down payment as an adequate cushion to mitigate any potential loan risks. With so much in necessary repairs, the cushion is simply not there.


All the best with your purchase,


Eric
About Real Estate Home Mortgages
This topic answers questions related to purchasing a home, owning a home, home ownership, mortgage education, mortgage applications, and mortgage needs whether buying a first home or refinancing a current loan. Issues related to home ownership, home equity, mortgage education, refinacing options, home improvment finacing, first time home loans, home equity loans, vactation home loans, and mortgages for investment homes are dealt with here also. Though not the primary focus of this topic, Home Equity Lines of Credits (HELOCS), reverse mortgages, and calculating home equity may also be asked. If you do not see your home mortgae, home finacing, or home equity question answered in this area then please ask a question here

Real Estate Home Mortgages

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Eric Forster

Expertise

Did your last mortgage broker or lender trick you into a messy situation which could cost you your home? I've been close to 30 years in the mortgage industry, and I've seen it all. Believe me, it is not pretty. As the owner of a mortgage company I am called frequently to testify as an expert witness in mortgage fraud cases and other cases where lenders did not fully disclose the terms of the loans they were offering to the borrowers. I have seen fraud being committed by borrowers - and by lenders. It's a tough world out there. And by the way - you are invited to visit my website, www.real-estate-expert-witness.net.

Experience

More than 25 years in loan production and underwriting in Southern California.

Organizations
Mortgage Bankers of America (Southern California Chapter)

Publications
Former columnist for AOL Financial Center and the author of a mortgage primer.

Education/Credentials
MBA (Finance)

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