K.B. asks from Sacramento, CA on April 22, 2009
I was hoping someone could help me. My husband and I are in the process of buying our first house. I am just getting confused with the loan process. We got prequalified for a FHA loan and we have 20% to put down. We have talk to two lenders and both of them have said that we need to pay PMI (private mortgage insurance). I thought that if you put 20% down you dont have to pay this. Also all the information off the internet has also told me that you dont have to pay this if you have 20% down. They tell me it doesn't matter how much you put down you have to have this. Is there anyone who has bought a house recently experience this?
So What Happened?™
wow thank you everyone for your information. I did find out that with a FHA loan you have to have PMI no mater what. However after 5 years you can be concidered to have it taken off. We also looked into a conventional loan like some of you suggested. Right now with our credit scores a FHA loan gives us the best deal. Thank you all again.
A.R. answers from San Francisco on April 22, 2009
I think the difference here is that it's an FHA loan... and as I understand it, regardless of the 20% down , ALL FHA loans require it that is why it's easier to qualify for an fha as oppose to a traditional loan..
now with that said, conventional loans allow you to get rid of the pmi once you reach 78% of the loan value, whereas with FHA you pay PMI for the life of the loan...
However, I do think PMI is tax deductible..
as with everything, I would research the net and type in FHA loan and PMI... I think you will find a wealth of info..
I wish you the best!! and good luck with your new home!!
P.W. answers from San Francisco on April 22, 2009
We are currently looking for a house and intend to put down 20% -- from what I've heard you are correct - no PMI if you put down 20%.
J.B. answers from San Francisco on April 22, 2009
Congratulations! We are in the same boat as you.
It is my understanding that if you have 20% down then it is better to get a regular loan specifically to avoid the PMI. FHA loans are best when you don't have 20% down, because then you can get a house with only 3% down.
E.L. answers from San Francisco on April 22, 2009
PMI was made tax deductible only recently, and there is no guarantee that it will be so forever. It was passed as part of all the measures to help homeowners.
I wouldn't count on it being tax deductible forever, and determine what you can afford on its deductibility.
From what I know, if you have 20% equity in your home (down payment), you do not have to pay PMI. When we refinanced our home recently, we had to pay a "charge off" amount to ensure we had 20% equity, since the value of our home had decreased, and hence our equity was no longer 20%. Thankfully, it was under $2k!
There have been a lot of articles about predatory lenders and tightening standards. I would shop around and see if you get the same story from other lenders. This doesn't sound right.
You also have to be mindful that 20% equity is sometimes not based on the purchase price, but the evaluation of the home. If the bank deems the home worth more or less even though you are only borrowing x amount, it can change the % equity you have. Also, I don't know if there are special conditions on FHA loans.
I should clarify the whole equity issue.
Let's say the house you want to buy is $300k. You have $60k to put down, that's 20%. You need to borrow $240k to purchase the home. The bank looks at the house and goes...nah, the house is not worth that much. They think it's actually worth $250k. You still need to borrow $240k to buy the house. It doesn't matter that you are paying $60k to buy the house. That's not "equity" even though it sounds like it should be. You still need to borrow $240k for a $250k home. Your LTV (loan to value) ratio is too high, no matter how much money you paid out of pocket. According to the LTV, you only have 4% equity, even though in your mind, you've paid 20%. It's the amount that you borrowed against the value of the home that dictates the 20% equity to avoid PMI.
I hope that helps.
This is why people are "underwater". They borrowed, say $500k, to purchase their home. All fine and dandy until the market tanks. The bank and market now tells them that their home is only worth $300k. Even if the person sells their home for $300k, they still owe the bank another $200k to pay back the loan.
T.H. answers from San Francisco on April 22, 2009
AR below is right; it's because it's an FHA. There are a couple differences when dealing an FHA loan. If you don't have a mortgage broker you should look into getting one. They really help explain the whole process in layman (SP?) terms.
Enjoy your new home!
Former escrow officer,