Conventional loans offer more flexible repayment terms in comparison to government-backed loans. Conventional Loans are offered in 30-25-20-15-10 year repayment plans. Whereas, government backed loans are typically offered in just 30 or 15 year repayment terms. In addition, conventional financing requires good credit and a healthy debt-to-income load.(typically total debt ratios are limited to 45%) However, If you lack this criteria, which is set by Fannie Mae, or Freddie Mac , you can always turn to Government based financing backed by the Federal Housing Administration or the Department of Veterans Affairs, provided you are an eligible veteran. Typically these government sponsored loans offer more options for borrowers with a Higher debt to income ratio or lower credit scores. In addition, You can also opt for a conventional loan with PMI. You typically pay the annual PMI premium in monthly installments, along with the mortgage payment, or you can also opt for a Lender-Paid Pmi loan.
LENDER PAID PMI
You can forgo monthly PMI installments by increasing your conventional loan’s interest rate. Known as lender-paid PMI, the lender covers the PMI premium for you and passes the cost onto you by increasing your interest rate. Your rate generally increases by a Quarter of a percentage point to a full percent, depending on your credit score and loan to value(LTV). Moreover, you can ultimately end up paying slightly more over the life of your loan with lender-paid PMI. However, studies have shown that the average mortgage is paid off in 7-10 years. Depending on how long you plan on keeping the mortgage, will determine whether or not Borrower paid or lender paid PMI insurance is right for you. Always discuss your options with your loan officer to find out what would be a better fit for your individual financial situation.
BORROWER PAID PMI
You can pay for your PMI premiums monthly in addition to your principle and interest payment. PMI premium calculations are determined by a number of factors such as Credit score and Loan to value . Monthly premium PMI usually can be cancelled when your loan balance reaches 78% of your original loan appraised value. However in some cases lender paid PMI may be an overall lower total loan payment the borrower paid PMI initially: Always talk to your mortgage loan officer to determine which PMI scenario is right for you.
Unless you eliminate the need for PMI altogether by meeting all conventional loan standards, (generally putting 20% or more down), you face drawbacks to getting a loan without PMI payments. When the PMI premiums become part of your loan payment, either through the interest rate or the loan balance, you eliminate the opportunity to cancel PMI, thereafter. The Homeowner’s Protection Act of 1999, or the PMI Act, allows for automatic cancellation of PMI when you pay your balance down to 78 percent of the original amount. Under the Act, you can also request permission to cancel PMI payments once you have 20 percent equity in your home. Your lender may require a new appraisal on the property in order to cancel the PMI. Each lender is different, but most lenders will cancel the PMI once the existing loan balance reaches 78% of your original appraised value.