Private mortgage insurance is a requirement of any conventional loan that has a loan to value ratio higher than 80 percent. This means that you put down less than 20 percent on the home. The HomeReady™ program is a low-income mortgage product that provides mortgages for consumers that have good credit but cannot afford a traditional loan. Because of this and the requirement for only a 3 percent down payment, a large majority of homebuyers have mortgage insurance on the HomeReady™ program.
What is Mortgage Insurance?
Mortgage insurance is protection for the lender when you put less than 20 percent down on the home. This helps give the lender a guarantee that they will get paid even if you were to default on the loan. This makes it more feasible for lenders to make riskier loans. The amount of mortgage insurance varies typically, based on your credit score and loan-to-value ratio.
Mortgage Insurance for HomeReady™ Mortgages
The mortgage insurance required for the HomeReady™ Mortgage is divided into two categories:
- Loan-to-value ratios higher than 90 percent
- Loan-to-value ratios at or below 90 percent
The requirements for mortgage insurance for HomeReady™ mortgages are standard for any LTVs at or below 90 percent. LTVS higher than 90 percent require 30 percent coverage, which differs from Fannie Mae’s standard requirements. A standard Fannie Mae mortgage requires 35 percent coverage for loans with an LTV between 90 and 95 percent and 35 percent coverage for loans with an LTV between 95 and 97 percent. This helps to keep the HomeReady™ Mortgage more affordable for low-income borrowers.
There are a few stipulations you must follow in order to be approved for mortgage insurance, as there is an underwriting process for this aspect of the loan as much as there is for the loan itself. In general, you must live in the home as an owner-occupied property; if you do not live in the home and are a non-occupying borrower, the maximum LTV is 95%. In addition, the maximum debt ratio allowed for any loan is 43%.
When can you Cancel Mortgage Insurance?
Just like any conventional loan, you are able to cancel mortgage insurance once your home’s loan-to-value ratio is below 80 percent. You will know the exact date this will happen when you sign the closing documents as you are required to receive an amortization table that shows you the breakdown of how your payments affect the principal of your loan.
Of course, you have a few other options if you do not want to wait the many years it will take to hit below 80 percent coverage. These options are as follows:
- Refinance your loan if you think the value of the home has increased and you have enough equity to make the LTV below 80 percent
- Make extra principal payments as you can afford it to start knocking the principal down faster
If neither of these options are a good choice for you since this is a low-income product, you can simply make your standard payments and wait until you naturally hit below 80 percent, at which point the mortgage insurance is required to be canceled, by law.
The lower mortgage insurance rates for the HomeReady™ program go right along with the premise of the loan – an affordable loan for low-income families. With the ability to use total household income, even income from those that are not on the loan, this program makes it possible for many more people to become homeowners. The largest stipulation is that you have the credit to qualify and the 3 percent to put down on the home to start the mortgage.Click to See the Latest Mortgage Rates»