MANY First Time Home Buyers in NC are now using the Conventional Fannie Mae Home Ready program to purchase a home. So many, in fact that for the first time in decades, FHA is no longer commanding a large share of this unique market. Why is that happening? In part it is because Conventional Loans no longer require huge down payments. The larger, more interesting reason is that Fannie Mae is currently allowing us to count zero if your Student Loan debt is in Income Based Repayment status. Because of this unique situation, PMI guidelines for high ratio Borrowers are getting tighter – FAST.
What is PMI
PMI is the term used for Mortgage Insurance. No, not the kind of Insurance that kicks in if you die before you pay off your mortgage. It doesn’t help with that at all.
The main benefit of Mortgage Insurance is protection for the lender. Private Mortgage Insurance, or PMI, is required on all traditional conventional mortgage loans where the borrower puts less than 20% down.
If a home is foreclosed on, the bank is much more likely to “break even” on the sale of the property if there is at least 20% equity in the home. However, we understand that not every borrower is able or desires to empty their wallet on a down payment, and this is why traditional Conventional Mortgages are offered with as low as 3% down payment.
The rates for PMI vary based upon the borrowers credit score, the down payment – basically the risk attached to the loan. It then varies based upon a monthly rate or a single premium charge Meaning you can have the Lender pay the PMI, but they have to charge you a rate high enough to cover the fees for the “term” or single payment for the PMI… or you can just pay it in your payment each month, and get a lower mortgage interest rate.
The PMI Coverage Rate for the NCHFA Affordable Home Program is .18%. This means your payments on this program are significantly lower than any other form of PMI. There’s no upfront fee to be paid, and the rate does NOT change based upon higher or lower credit scores. It is, by far, the best game in town on a Conventional Loan. The mortgage interest rate for the program is set by the State, and it will not vary based upon what lender you use.
It’s the lowest PMI Rate available in NC… but your MORTGAGE Interest rate is likely to be slightly higher than what we are quoting for other Conventional Loans. Again, this mortgage rate is SET BY THE STATE, and it changes pretty regularly. Even with the slightly higher interest rate, the “break” for the lower PMI Rate (especially for those with credit scores under 700) makes this a GREAT program, saving most folks over a $1000 a year.
PMI can be removed under certain circumstances in NC:
- Automatic – Occurs when a borrower hits 78% LTV of the scheduled amortization. Cannot be used if borrower pays down balance to get to 78% faster than scheduled.
- Borrower requested (original value) – Most often occurs when a borrower pays down a balance faster than scheduled and requests PMI to be removed based on the value used at closing.
- Borrower requested (new value) – Occurs when a borrower requests PMI removal based on a new appraised value, and the loan has been open for at least two years.
Changes In PMI Guidelines For High Ratio Borrowers
Late last year, Fannie Mae made a change, and began approving loans for those with debt to income ratios between 45.00% and 50.00% to match the ratios already accepted by Freddie Mac. This includes the payment for the new home, plus all other debt reporting to a credit bureau.
For an exercise in math, let’s run some numbers. First you take your house payment, with taxes, insurance, PMi and any Home Owner Association fees (let’s say that tallies up to $2500 a month). To that you add your monthly revolving credit card debt, car payments and student loans. Child care, mobile service, Netflix – all of that stuff doesn’t count into the Total Debt ratio. So let’s say your Student Loans are in Deferment ($0 payment), and you pay $50 a month in credit card debt, and you have a $250 car payment. So we add $300 to the $2500 a month House payment for $2800 a month in debt.
Your household monthly income BEFORE taxes, etc. is a Gross of $6000 a month. We take the $2800, divide that by $6000 and come up with a 46% back ratio. So 46%, that’s pretty good, you are a good bit under the 50% total that Fannie says they can approve. Hold that thought we are going to circle back to this number.
*This might apply to you:
When there are 10 or less recurring monthly payments remaining on an installment debt and if the monthly payment doesn’t significantly affect the borrower’s ability to meet all obligations, Fannie will allow us to exclude the monthly payment. Think Car Payment.
Note: When DU determines the monthly payment to be insignificant, it will automatically omit the debt from the ratios.
Student Loan Debt that is in IBR or Deferred Status: If we can establish an IBR Payment amount on a Credit Report, we can qualify you on that payment for a Conventional Fannie Mae loan. Fannie Mae is now (effective January of 2018) the only alternative for those who are buying a house with student loan debt in IBR Status. READ: I need to get a letter from your Servicer on each of your Student loans specifically telling us that each loan is in IBR Status. Once I get that letter, I can update the credit report, and we can count ZERO as a monthly payment for your Student Loans.
OK, back to the Ratios and the reason we are talking about Changes In PMI Guidelines For High Ratio Borrowers. In our scenario, we were feeling pretty good about ourselves because we were a 46% back ratio, and we know that is going to get an Automated (AUS) Approval. The Golden Ticket, if you will.
But… the PMI companies are concerned that all of these folks with Student Loan Debt that they are going to have to eventually start making payments on, will not be able to afford their house and their student loan debt.
So the PMI companies have starting issuing the following statements:
Given the recent increase in loans with DTI ratios exceeding 45% and additional layers of credit risk within this segment, “Company X” is implementing a Min. 700 FICO score requirement for loans with a >45% DTI ratio.
The change applies to our Clear2Close® and Affordable Housing/HFA Guideline Summaries for loans with a valid DU®/Loan Product Advisor® response, and is effective for mortgage insurance (MI) applications received on or after today,
March 12, 2018.
What does this mean to you? Well, first off, the guy with a 46% ratio now has to either qualify for the mortgage with 2 credit scores over the 700 mark, OR he needs to find himself a cheaper house. He’s being squeezed out. This is happening as Mortgage rates are gong up some, and according to the guys at Realtor.com, the cost of a mortgage right now is about 13% more than it was last year – again, to buy the home of your dreams you need GOOD credit. Above 720 will get you the best PMI rates and mortgage interest rates.
If you read very much from this blog, you know that I am passionate about helping people with Student Loan Debt find the information they need, and I’m passionate about helping you buy a house. This is just the latest wrinkle. I’ve been in this business since I was 15 years old, and the thing I can tell you is that SOMEBODY will continue to want and make you guys loans. My sincere guess is that later this year, Fannie Mae will change a guideline, and FHA or Freddie Mac will taken on the majority of the loans.
REMEMBER, if you are in NC, and you need down payment assistance for a home – you are going to be limited by the Mortgage Down Payment Assistance Programs to a back ratio of 43%.
If you have ANY questions about Changes In PMI Guidelines For High Ratio Borrowers, please feel free to leave me a message below. I try and answer all questions. If you leave me personal details, I am now responding directly, as opposed to leaving your questions for others to learn from. Please call Steve and Eleanor Thorne, we are eager to help you with this next exciting step in your life! You’re going to own a home! Yippee!! 919 649 5058
I try and answer all questions :)