Here at EducateHomeBuyers.org we work to provide you with the most current information on purchasing, selling and refinancing your home.  Our objective is to help you make smarter financial decisions.

Private Mortgage Insurance, or PMI, is something that few homebuyers understand but more should. It is a cost and it is added into your monthly payment when you have less than 20% down payment.  Your credit score can play a big part in the cost of PMI when buying a home, especially if you have a low-down payment.

Private mortgage insurance is there to protect the lender’s investment when the borrower pays less than 20 percent down. Essentially, the down payment you are lacking is being covered by mortgage insurance.  If you default and lose the home to foreclosure, the mortgage lender can file a claim against the PMI policy and recoup some of their losses.

Without some form of PMI, you would be required to save up 20% down payment.  Mortgage lenders would not be willing to accept the risk of higher losses on low down payment loans.

Your Credit Score and PMI

Mortgage lenders should provide you with loan options based on interest rate and the cost of PMI.  Lenders look at your credit score when determining your loan program eligibility and cost.

Insurers put a lot of weight on the size of your down payment and your debt-to-income ratio. “In general, private mortgage insurance is available for borrowers with credit scores as low as 620 with down payments as low as 3 percent,” says Anthony Guarino, senior vice president of pricing and credit policy for Genworth Mortgage Insurance.

Many homebuyers required to buy PMI

Private mortgage insurance is a common cost, especially for first-time homebuyers, who accounted for one-third of home purchases in 2019, according to a survey by the National Association of Realtors.

First-time buyers typically paid down 6 percent, financing 94 percent of their home purchase, the NAR survey says, while repeat homebuyers typically paid 16 percent down, financing 84 percent of the purchase price. Repeat buyers often have the proceeds of a home sale to use toward a down payment, enabling them to borrow less.

The annual cost of PMI is typically expressed as a percentage of the loan amount and is paid in equal monthly payments. So, the more you borrow, the higher your PMI payment.

Credit scores and PMI rates are linked

PMI costs have a broad range, roughly 0.25 percent to 1.5 percent of the amount borrowed. Insurers use your credit score, and other factors, to set that percentage. A borrower on the lowest end of the qualifying credit score range pays the most.

Typically, the mortgage insurance premium rate increases as a credit score decreases, see the exampe:

A house sells for $333,333 and the borrower pays 10 percent down, leaving an outstanding loan balance of $300,000 with a 30-year, fixed-rate mortgage. A borrower with a “very good” FICO credit score (at least 740) might pay 0.20 percent to 0.30 percent of the loan balance for PMI, or $50 to $75 a month, says Guarino.

A borrower with a “good” FICO credit score (670-739) will pay more than the “very good” borrower, estimating 0.35 to 0.40 percent of the $300,000 mortgage, or $80 to $100 a month.

But a homebuyer with only “fair” credit, in the neighborhood of 620-660, might pay 0.75 to 1.50 percent of the loan balance, or $188 to $375 per month.

A small change in credit score, 1 to 10 points, may have limited impact, but a lower credit score ranging from 620 to 660 could result in a cost two to three times that of someone with an outstanding credit range of 760 to 800.

Mortgage insurance for FHA loans works differently, but your credit score still counts when it comes to how much you pay and what is the most economical loan program for you.

There are a number of steps you can take to improve your credit score, especially if you plan to buy a house. Your credit score is one of those things that can drive tangible savings.  That is something within the borrower’s control and will have a benefit when it comes to a mortgage loan.

PMI Helps Put You in a Home Earlier

Private mortgage insurance is an added cost of homeownership that buyers dread, but the fact is, many people would not be able to buy a home without it. PMI opens doors for borrowers who can’t get over one of the biggest hurdles to homeownership: the 20 percent down payment.

PMI has helped more than 30 million families nationwide to become homeowners over the past 60 years, according to the U.S. Mortgage Insurers, a trade association.  PMI can help borrowers purchase homes sooner than they would otherwise be able to and with as little as 3% down payment.

If you have questions, please reach out to Curt Tiedeman, License NMLS 35554, 206-650-4202, Curt.Tiedeman@CaliberHomeLoans.com