FHA, LTV... OMG!
by David Bediz for the Washington Blade
September 10, 2010
like in the world of texting, acronyms abound
in real estate. But in a real estate transaction,
acronyms can have profound financial implications.
For example, PMI, or Private Mortgage Insurance,
is a monthly charge that can be hundreds of dollars
when buyers have most loans that exceed 80 percent
of the property’s appraised value (80 percent
Loan to Value, or LTV). Nobody wants to pay that
fee, since it’s there only to protect the
lender in the event of borrower default, and especially
since it could be paying your cell phone bill
instead (and maybe your cable bill too!).
Federal Housing Administration (FHA) loans are
attractive to many buyers with low cash on hand
because the interest rates are very competitive
and the minimum downpayment is only 3.5 percent.
However, all FHA loans have a mandatory monthly
PMI payment for five years, even if the original
LTV (Loan To Value, remember?) is lower than 80
percent and even if, over time, the loan value
drops below 80 percent by appreciation or increased
equity from making payments against the principal.
In addition, FHA loans also have a UFMIP, or
Upfront Mortgage Insurance Premium, which is currently
2.25 percent of the loan amount but will drop
to only 1 percent on Oct. 4, and which is generally
added to the loan amount. It can be paid off “up-front,”
hence the name, but usually buyers lump it into
the loan and forget it’s there, until they
want to sell and need to get that much more money
for their home to pay it off. The Oct. 4 date
is no early Christmas present, however, as the
monthly PMI payments will nearly double under
the new program.
VA (Veteran’s Administration) loans are
similar to FHA because both are loans on properties
that have to be approved by HUD and both are government-backed.
VA loans have a “funding fee” similar
to the UFMIP, but it is 1.25 percent to 3.3 percent
depending on downpayment and repeated use of eligibility,
but it is waived for qualified disabled veterans
or surviving spouses of vets killed in service.
Conventional loans (i.e., non-FHA, Fannie/Freddie
loans) also will charge you PMI for an LTV greater
than 80 percent but will allow you to re-appraise
the home after a shorter period to show the greater
equity and remove the PMI requirement. Conventional
loans also do not have the 2.25 percent or 1 percent
upfront premium. However, nearly all conventional
loans require at least 5 percent downpayment,
and some require 10 or 15 percent, depending on
the bank, the type of property and some other
qualifications. For condos in buildings that have
more than 30 percent tenant-occupants, many banks
require 20 percent down or more.
PMI payments can be avoided by taking a higher-interest-rate
loan, which is typically called a “Lender-Paid
MI option,” but most opt against this since
they can lock in a lower rate and eventually eliminate
their PMI payment with increased equity. The only
good candidates for LPMI are those whose incomes
are too high for them to deduct PMI payments from
their taxable income.
All this may be TMI depending on your ETA to
buy your HOC, but it pays to get a mortgage vocabulary
primer ASAP if you’re considering a purchase
or refinance. To help you navigate these important
and complex decisions, talk to your Realtor or
a qualified lender so you don’t let too
much of your money go AWOL.