By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
QUESTION: We recently “lost” a house purchase because we were turned down by “PMI.” We qualified for the actual loan but not the PMI. What is PMI, how does it work, and how can we avoid this problem in the future? We are still shopping for a house.
ANSWER: Hopefully my answer will convince you that there really is life without PMI. PMI has been around for years and is exactly what the name implies: Private Mortgage Insurance. The typical conventional lender will make a loan on your single family residence (or up to four units) for up to 80% of the sale price or appraised value of the property, whichever is less. In the real world, however, with Southern California’s high real estate prices, many people don’t have a 20% down payment. PMI is merely an insurance policy FOR THE LENDER for the amount of the loan over 80%. If the lender therefore makes an 85%, 90% or 95% loan, they will be insured by PMI for the “risky” level above the standard 80% loan to value ratio. Let’s not dwell on the mechanics; let’s look at the costs and related problems.
Private mortgage insurance costs you EACH YEAR somewhere between one third and three quarters of 1% of your entire loan amount. The extra cost for PMI on an 85% (of purchase price) loan would be approximately 1/3 of 1% PER YEAR. On a $100,000 loan, that is a cost of $330 per year, year in and year out. On a 90% loan the cost might be as much as 1/2 of 1% of the loan amount, and a 95% loan PMI might be as high as 3/4% of 1% of your loan amount. Obviously, the theory is the less down the more risk, therefore a higher charge. Just imagine paying an extra .75% on a $200,000 loan amount year after year. That works out to $1,500 a year or almost $5,000 EXTRA in just three years. Not only is this very expensive and TOTALLY UNNECESSARY, but it also slows down or even screws up the loan approval process, as you found out on your first try. There is nothing more frustrating than to be approved for a loan and then delayed 3-4 days for a secondary approval by the PMI company. This can be nerve wracking.
There are many, many lenders in the market today and they are very competitive. Most good mortgage brokers can find a way around PMI. Some lenders will make an 80% first trust deed AND a 10% second trust deed. The interest rate on the second trust deed may be slightly or substantially higher than interest on the first trust deed. Though it has been approximately 20 years since I have personally sold real estate for a living, I assure you that when I did sell real estate I was smart enough to work around PMI.
The SELLER is, in fact, the easiest way to avoid PMI. Not only will you save the costs and delay of PMI, but you will also save the necessity of an impound account with a bunch of money funded in advance (out of your pocket) to fund the impound account. If applicable, merely make your offer with 10% down and an 80% first trust deed, with the seller carrying back a second trust deed in the amount of 10% of the sale price. This is commonly referred to as an “80/10/10 loan.”
To make it simple, a $100,000 purchase would look something like this: The new first trust deed would be $80,000. The seller would carry back a second trust deed in the amount of $10,000 and the buyer would put $10,000 down. This can work with either 5, 10 or 15% down. If you have a good real estate broker there should not be much of a trick in persuading the seller to carry a second. If the seller is physically not able to carry a second or just doesn’t want to, the second can still be carried and the broker can arrange to have it sold during escrow. Any good real estate broker or mortgage broker should be able to help you avoid PMI completely on your next offer. Hopefully, this is the last time you will ever hear the words “private mortgage insurance.”
Peter Rosenthal
VIP Trust Deed Company