Proposed changes to requirements for private mortgage insurance could increase mortgage costs for many homebuyers, particularly borrowers with relatively poor credit, according to a new report from the Urban Institute and Moody’s Analytics.
Borrowers are required to get private mortgage insurance (PMI) when their down payment is less than 20% of the home’s value, to protect the lender in the event the borrower defaults on the loan. Given the high number of defaults in the mortgage crisis, the mortgage insurance industry was strained, which is why there’s a push to strengthen protections moving forward.
What we’re talking about here is money: The riskier the loan (those made to borrowers with poor credit), the more money the insurer needs to have on hand in order for government-sponsored entities Freddie Mac and Fannie Mae to back the loan. The plan proposed by Freddie and Fannie requiring mortgage insurers to hold more capital against the loan would translate into a 0.1 to 0.15 percentage-point increase in mortgage insurance premiums for borrowers across the board. The lower the borrower’s credit score, the more that premium will increase: Borrowers with a 700 credit score could see premiums jump 0.2 to 0.25 percentage points; those with a 650 score would see a 0.6 to 0.65 percentage-point increase.
“While the increase in capital requirements is clearly warranted, there are certain features of the requirements as currently drafted that will increase mortgage insurance premiums unnecessarily, running counter to the aim of policymakers, including the FHFA (Federal Housing Finance Agency), to encourage greater use of private capital in housing finance,” a portion of the report reads.
Currently, FHA loans, while more accessible for borrowers with lower credit scores, carry fees (including PMI) that can make the loans more costly than conventional loans. However, according to the report, the proposed increase in mortgage insurance premiums would be so great for borrowers with a score lower than 680 that conventional loans would become the more costly option.
Comments on the requirements draft are due Sept. 8.
Homeowners often overlook the expense of PMI, which adds an average of $100 to a monthly mortgage payment. That can seriously affect a borrower’s ability to afford the loan, which is why aspiring homeowners should familiarize themselves with the many expenses associated with buying a home. Buying a home you can’t reasonably afford can seriously jeopardize your financial future, so it’s worth your time to research home loans, make sure your credit is in good shape (you can check two of your credit scores and get a plan to help you improve them for free on Credit.com), and honestly determine how much you can reasonably expect to pay for a new home.
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