Private mortgage insurance providers have recently relaxed guideline requirements to allow 90% financing up to the high-balance conforming product’s limit of $729,750. The expanded offering is currently limited to purchase money for the acquisition of owner-occupied, single-family homes. The willingness of mortgage insurance companies to augment their coverage to 90% suggests there is increasing stability within California’s housing market and will likely foster greater competition for properties in the low $800,000 purchase range. Buyers with limited down payment funds can now secure excellent 30-year fixed rates to a purchase price just shy of $811,000 with only 10% down.
Any conventional loan that finances more than 80% of a home’s value requires mortgage insurance and, until recently, most MI providers held the line at 85%. Because a smaller down payment translates to higher investor risk, conventional 90% financing is restricted to strong borrowers whose only limitation is in the amount of down payment funds. Debt-to-Income ratios should be around 41% and the minimum Fico score is 720. Borrowers should also have at least two months’ PITI reserves after satisfying down payment proceeds and closing costs.
As is typical of loans exceeding 80% financing, borrowers must pay their property taxes and hazard insurance on a monthly basis through an impound account. They must also make monthly mortgage insurance payments until the equity in their home increases to 78%, at which point the payments can be definitively removed. These MI payments are not insignificant and, on a $729,750 loan, can amount to as much as $529 per month. One option offered by just a couple lenders is to buy out the mortgage insurance at a cost of 2.60 points (roughly $18,973 on the equivalent loan). Although fairly expensive, this cost is covered by the $529 payment reduction in just 36 months. Alternately, borrowers can sometimes cover the buyout by incurring a slightly higher interest rate. While this increases the mortgage payment by roughly $100 per month, financing the mortgage insurance through “lender paid MI” should offer the added benefit of being tax deductible.
The new 90% high-balance loan also allows for 5% gift money as long as the borrower has 5% matching funds. Seller credits of up to 3% of the purchase price are also permitted and may be used to offset closing costs or to lower the interest rate.
Borrowers unable to meet the 10% down payment requirement or who have more challenged credentials (poor credit ratings, limited reserve funds, etc.) will still have the option of FHA loans which offer low rates, but carry higher closing costs. FHA loans all mandate a mortgage insurance premium of 2.25% of the loan amount and there is no option of buying out the monthly mortgage insurance payments.
Nicholas Ballard is both a mortgage broker and banker specialized in the residential Marin market. For assistance, please call or e-mail:
Nicholas Ballard: 415-526-1941; firstname.lastname@example.org
Real Estate Financing
CA Dept. of Real Estate #01356374
California Mortgage Advisors, Inc.
CA Dept. of Real Estate #01170868
Redwood Highway, San Rafael 94903