Part 2: When the Little Things Provide A Full Picture
My name is Steve Richman, and I’m That MI GuySM for Genworth Mortgage Insurance. Private mortgage insurance isn’t exactly a mainstream topic, but it makes a mainstream impact by allowing borrowers to secure a mortgage without the traditionally required 20 percent down payment. Throughout this four-part series, (Read Part 1) I will use real-life testimonials to show you how this works, and hope that you can apply some of these tips to your own situation.
The following testimonial is from Abby McDaniel, Senior Mortgage Loan Officer for AmeriFirst Financial, Inc. in Denver, CO:
A few years ago, I had been contacted by a real estate agent whom I knew quite well. She was working with a family who was very committed to buying a home, ensuring that they did all of the little things right. They did their research, shopped around, and put in several offers, but for reasons unbeknownst to them at the time, their offers were consistently getting beat.
At the time, this couple was solely applying for FHA mortgages because they thought, with the roughly 10 percent they had saved for a down payment, this was the only way to become a homeowner. What they didn’t know is that many listing agents were shying away from FHA loans because the corresponding appraisals were fixed with the property and, if for some reason a loan didn’t close, the sellers would have to wait six months before being able to secure a new appraisal and put in a new application. In contrast, using a conventional mortgage with private mortgage insurance allowed for greater flexibility from both the borrower and seller standpoint, so we looked at that option.
In doing so, with only putting 10 percent down, we secured this couple a lower mortgage insurance premium than what they would have been paying with FHA. Just by going the conventional route as opposed to FHA, they were saving $100 per month on their monthly mortgage payment. Just like that, after months of not getting anywhere, a few adjustments had turned this couple into homeowners.
But there was one other element that helped them reach this phase, and that’s their credit profile. Despite their initial struggles, this couple was financially disciplined – both had good jobs and routinely paid their bills. But what went unnoticed is that this couple had a maxed-out credit card that they had completely forgotten about. The dollar amount on the debt was minimal, only $400, but the card itself had a limit of $500, so their card was 80 percent maxed out. In my experience, it’s always best to try and carry a balance of 10 percent or less of your available credit on any credit card. The couple immediately paid down this debt and a few other similar, minimal items, and within 30 days their credit score was in the 700s.
Since the time of their home purchase, the couple had built up enough equity, equivalent to a 20 percent down payment, to cancel their mortgage insurance premiums. Had they gotten an FHA loan as they were originally applying for, they would have been unable to cancel the premium regardless of reaching the 20 percent threshold.
No longer having to pay mortgage insurance reduced the couple’s monthly payment by $150, meaning that between going the conventional loan route (as opposed to FHA, which saved them $100 per month) and then cancelling their mortgage insurance after reaching the 20 percent equity threshold (which saved them an extra $150 per month), their monthly mortgage payment was now $250 lower.
That led to the couple successfully having built up enough equity to do a cash-out refinance and they used that cash to remodel their house and improve its value, thereby increasing their equity proportionally. This improved the market value of their home, which positions them to upgrade to a higher price home when they are ready.
Steve’s Key Takeaways:
- Understanding the benefits of, and differences between, private mortgage insurance loans versus FHA is a paramount advantage, particularly given the wave of first time homebuyers entering the market.
- Knowing that real estate agents in many cases prefer private mortgage insurance (recall the aforementioned FHA appraisal restrictions) is also important.
- While interest rates are an important factor, they aren’t the only factor. As you saw in this article, credit can be critical, and identifying those “extra” factors, and looking deeper, speaks to the benefit of understanding your customer holistically to optimize your relationship. Doing so will satisfy all three parties – the buyer, the buyer’s agent, and the seller’s agent.
So, in sum, a holistic approach, and mastering intricacies, is key, because sometimes…it’s the little things that count.
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And read Part 1 of the Unlocking Homeownership Series.