Top 10 Truths: Mortgage Insurance

Mortgage Insurance (MI) aka Private Mortgage Insurance (PMI) is a necessary evil in today’s lending environment for many home buyers. Here are the top 10 things to know about mortgage insurance:

  1. What is Mortgage Insurance?
    Mortgage insurance, aka MI, is an insurance policy which compensates the lenders or investors for losses due to the default of a mortgage loan. If a borrower defaults on the mortgage, the lender or investors is paid back a portion of the loan balance.
  1. Why do I pay Mortgage insurance?
    Loans requiring mortgage insurance are considered higher-risk. Put 20% down on a conventional loan and pay no MI.
  1. When do I pay Mortgage Insurance?
    There are two types of loans that charge MI: Conventional Loans and FHA Loans.

Conventional loans typically require mortgage insurance when down payments are below 20%. More factually, mortgage insurance is required with the 1st mortgage is over 80% loan-to-value.

FHA 30-Year loans require mortgage insurance on all loans regardless of the down payment amount. As of June 3, 2013, the monthly mortgage insurance remains for the life of the loan – for loans over 90% loan-to-value, i.e. when the borrower puts less than 10% down.

  1. How do I avoid paying Mortgage Insurance?

Put 20% down on a conventional loan or chose a 1st and 2nd loan combo. No FHA.

  1. How do I pay the Mortgage Insurance?

Mortgage insurance is charged two ways: Monthly-Paid or Single-Paid. Monthly-Paid MI charges on a monthly basis. Single-Paid MI charges a one-time fee at the close of escrow as part of the closing costs.

  1. What determines how much Mortgage Insurance I pay?

FICO score and down payment are the two main factors to determine the cost of mortgage insurance. Higher FICO scores and a larger down payment = lower MI costs. A high FICO score will lower the mortgage insurance premiums dramatically.

  1. Mortgage insurance Cost

FHA charges 1.30% annually on average.

Monthly-Paid MI costs 0.70% on average.

Single-Paid MI costs 2.5% on average.

Actual charges vary.

  1. How to get rid of Mortgage Insurance?

The US Homeowners Protection Act of 1998 allows for borrower to require PMI cancelation when the amount owed is reduced to a certain level, most commonly = 80% loan-to-value. This is for conventional loans only as FHA charges MI on every loan. The only way to ever get rid of MI on FHA loans is to refinance out of FHA and into a conventional loan. Paying down the loan balance or property values increasing are the two ways to get rid of mortgage insurance.

Is MI tax deductible?

No. As of Dec 31, 2013 mortgage insurance the IRS longer tax deductible.

               9. Who pays the MI?

Three parties are allowed to pay the MI.

  • Borrowers (you).
  • Sellers.
  • Lenders

10. Lender and Seller Credits

Lending guidelines allow sellers and lenders to give limited credits to be applied to the borrowers closing costs. To pay off the mortgage insurance entirely, typically the borrower chooses the Single-Paid MI option and negotiates with the seller or lender to cover the cost.

Seller Credits
have to be negotiated as part of the contract negotiations between the buyer and seller. Lenders have the ability to generate Lender Credits by increasing the borrower’s interest rate on most loan products and in most cases. On average, a 0.50% increase to the rate generates enough credits to pay the cost of the Single-Paid MI fee. The benefit to increasing the interest rate and eliminating the mortgage insurance payment is an overall lower monthly payment.

In conclusion, nobody likes mortgage insurance but the alternative is to either make a larger down payment or not buy at all. VA loans do not charged mortgage insurance but one must be a Veteran. Good news! Go enlist for 4 years with the US Military, Army or Navy and pay no mortgage insurance on your next loan.

Top 10 Truths: FHA Loans

The FHA was established in 1947 and experienced a re-birth after banks discontinued the stated-income qualification around 2008. For buyers who had between 3% and 10% down FHA became the “only game in town,” as conventional loans required 10% down before the minimum down payment dropped to the current 5% level.

Here are the top 10 things to know about FHA loans:

  1. FHA is NOT a first-time home buyer program.
  2. FHA allows buyers to have one FHA loan at a time–with few exceptions.
  3. FHA charges monthly mortgage insurance FOR LIFE on ALL LOANS regardless of the down payment.
  4. FHA allows a low 3.5% down payment.
  5. FHA charges the highest mortgage insurance premiums in the industry.
  6. FHA allows for bankruptcies, foreclosures, short sales, and loan modifications, with a waiting period of only a few years after-the-fact.
  7. FHA does not require “reserves” in most cases, meaning you are allowed to have only $1 in the bank “post-close,” i.e. after paying the down payment and closing costs and closing escrow.
  8. FHA allows “owner-occupied” properties only. No investment properties or second homes allowed.
  9. FHA charges a 1.75% one-time upfront mortgage insurance fee on all loans in addition to monthly mortgage insurance.
  10. FHA’s monthly mortgage insurance premium has tripled since 2010, and its one-time upfront mortgage premium has almost doubled since 2010.

The most common misconception is that FHA is a first-time home buyer program, which it is not. But with its low 3.5% down payment option, many first-time home buyers use FHA loans and, for them, they can be a great option.

Top 5 Ways to Avoid Monthly Mortgage Insurance

Many home buyers are unable to avoid monthly mortgage insurance–it’s part of taking that next step and buying a property even if you don’t have a large down payment. But if possible, use these 5 strategies to avoid paying monthly mortgage insurance.

  1.  Make a minimum 20% down payment on a conventional loan. 20% down is the magical number to avoid paying monthly mortgage insurance.
  2. FHA requires mortgage insurance on all loans, so avoid FHA loans if possible.
  3. 1st and 2nd mortgage combos eliminate the need for mortgage insurance.
  4. HOMEPATH loans do not require mortgage insurance. Homepath loans are only allowed when “Fannie Mae” is the seller.
  5. Mortgage insurance can be paid in two ways: “Single-Paid” or “Monthly-Paid”. Choose the single-paid option and pay the mortgage insurance in full to eliminate the need to pay monthly.

With a conventional loan, monthly mortgage insurance eventually falls away, and FHA loans can always be refinanced into conventional loans to eliminate mortgage insurance. So don’t feel bad if you need to incur mortgage insurance to get into a home.

#1 Tax Benefit in America: The Home Sale Tax Exclusion

Did you know that in 1913 only 1% of the population paid income taxes, with a rate of up to 7% depending on their tax bracket. Yes, taxes are higher today (to say the least), but the good news is that there are still a number of great tax benefits out there. In fact, the Home Sale Tax Exclusion is one of the most incredible tax benefits remaining today!


Here are the top 4 things to know about the Home Sale Tax Exclusion:

  • The property must be owner occupied the last 2 out of 5 years.
  • Second homes and investment properties are not allowed.
  • You only pay taxes on profits above $250,000 for a single person and $500,000 if you’re married and after a 24-month ownership period.
  • There are no limits to how many times you may use this benefit.

It is perfectly legal to buy a property, live in it for 2-years, sell the property, take advantage of the Home Sale Tax Exclusion and do it all over again. How else can you make $250k to $500k in profit and pay zero taxes!

Top 4 Reasons Why Rich People can’t Qualify for a Home Loan

If you are home buyer of more modest means who has had a challenging time qualifying for a home loan, you might enjoy reading this article! In today’s lending environment, even being rich does not necessarily mean that qualifying for a loan will be easy. Income is just one of many factors needed. In fact, many successful people have a harder time qualifying for a loan than the average person.

Here are the top 4 reasons why rich people can’t qualify for a home loan:

  1. Not Enough Documented Income

Business owners have the luxury of managing how much income they pay themselves. It is perfectly legal not to pay yourself and keep the money in your company in order to avoid paying taxes on that money. This is a great way to save on taxes, but it can be a detriment when it comes time to qualifying for a mortgage. Lenders qualify home buyers based on their adjusted gross income, i.e. income one pays taxes on.

  1. Lack of Credit

To qualify for a loan, one must have a history of credit established. On average, you need a 2-year history showing 3 active accounts, which includes credit cards, student loans, car loans, to name a few. A lender or investor wants to see that you have the ability to borrow money and pay it back on time. Rich people don’t always have car loans, student loans, or have a need for multiple credit cards—they may not even have a credit card. Not having a credit history can be as limiting as having a bad credit history, and sometimes it’s even more limiting!

  1. Bad Credit

Rich people can afford to pay less attention to their credit than the average person. Paying a bill late is not necessarily considered a big deal in the eyes of someone making a ton of cash, yet too many late payments or collection accounts reported on one’s credit report is damaging regardless of how much money you make!

  1. Too Much Debt

Rich people oftentimes are not afraid of taking on debt. High car payments, other mortgages and high credit card debt ads up quickly. If you’re the successful one in the family, you may have co-signed for a car or student loan for one or multiple family members. Co-signing is a very nice thing to do for someone, but it can bite you in the butt when it’s time for you to qualify for a new home loan.

Regardless of how much money you make, keep your credit clean, pay all bills on time, manage your debt, and use your credit frequently. It pays to have excellent credit.

Top 4 Major Tax Benefits to Owning a Property

Home ownership has its privileges, including saving money at tax time! Here are the current major tax deductions home owners enjoy as of Jan 1, 2014 and the top major tax benefit to owning a property today.

  1. Mortgage Interest.
  2. Property Taxes.
  3. Points – “Discount Points” are a cost paid to “buy-down” the interest rate. Point costs are tax deductible.
  4. Only some renovations are tax deductible. Solar panel, small wind turbines, geothermal heat pumps and solar powered water heaters for example are tax deductible through 2016.

Note! Mortgage insurance premiums paid or accrued after December 31, 2013, were supposed to no longer tax deductible but the Obama administration extended the ability to write off mortgage insurance premiums for the tax year 2014.

Home owners are allowed to write-off mortgage interest and property taxes annually along with discount points paid at the time of purchase and limited renovations. Writing off these expenses allows the home owner to not pay taxes to the IRS on the amount deducted. To fully understand these tax rules, visit the IRS website or contact your CPA or tax preparer.

3 Basic Requirements to Qualify for a Home Loan

There are many requirements to qualify for a home loan, but it all starts with these 3 basics:

Employment: A 24-month work history is required. Time in college may be counted as part of the 24-month history.

Credit: A 2-year credit history with 3 active trade-lines. “Trade-lines” are lines of credit reporting on your credit report such as credit cards, car loans, and student loans.

Money: A minimum down payment and closing costs are required.


As always, exceptions to most rules in lending do exist. Yes, you can sometimes get away with less than a 24-month work history but MOST of the time you need 2 years on the job to show stability. If you’re returning to work after taking time off, a 2-year history is not generally required. Same goes for the credit history. One does not always need 3 active trade-lines for 2 years. For more specific questions, feel free to contact me anytime.

Fun Fact: Sellers, lenders, and agents are allowed to contribute towards your closing costs!

Money Saving Tip! How to Pay NO Closing Costs

When purchasing or refinancing a home, closing costs are a part of every transaction. But you don’t necessarily have to be the one paying for them!

The basic closing costs for any real estate transaction include escrow and title fees, lender fees (including appraisal fee), pre-paid interest, property taxes, and insurance. Closing costs, on average, are 1-2% of the purchase price for a purchase loan, and $3k for a refinance.



Sellers, lenders, realtors, and gift donors are all allowed to contribute towards closing costs.

Seller credits can be negotiated as part of the contract negotiations between the buyer and seller.

Lenders have the ability to generate “lender credits” by increasing the interest rate from the going rate.

Realtors are allowed to contribute using their commission (though it rarely happens).

Gift donors are family members who contribute money towards the purchase of the property.

If you have the down payment on a home you want to purchase and are merely missing some or all of the closing costs, don’t let a good deal pass you by. Sellers, lenders, realtors, and family members can all help you get the closing costs paid. Take advantage of the opportunity to get into a property!

Low-Doc Loan Programs. No Income Docs Required!

Low-doc, a.k.a. stated-income, loan programs ruled the loan industry in this country until the economy collapsed in 2008. Many qualified and non-qualified buyers enjoyed the convenience of these easy-to-qualify-for loan programs.

A stated income loan program allows a buyer to “state” their income without having to prove it with tax returns and paystubs.

Today, low-doc loan programs are still available to higher income earners with large cash assets and excellent credit.


Here are today’s standard low-doc loan program requirements:

  • 30%-40% minimum down payment.
  • $100k (or more) in cash reserves post-close.
  • 720 minimum FICO score.
  • Excellent credit. No previous credit issues such as a bankruptcy, short sale or foreclosure.
  • Single Family Residences only.

No longer designed for your average home buyer, banks and investors tend to offer these low-doc or stated-income programs for the sole purpose of establishing a business relationship with high-income earners. For those select few, low-doc loan programs are a convenient way to qualify for a home loan.

Top 10 Truths: Escrow

When buying, selling, or refinancing a property, the services of an escrow company will be necessary. Here are the top 10 things you need to know about escrow:

  1. An escrow company is a neutral third party licensed by the California Department of Business Oversight. It receives and disburses money and documents and acts as an intermediary between the buyer, seller, lender, and realtor and follows written instructions provided by them.
  2. Most accurately, the word “escrow” refers to “money held by a third-party on behalf of transacting parties.” Practically, we use the word escrow as short-speak for “escrow company” or “escrow time period.”
  3. Escrow time periods are 30-45 days on average but can be anything the buyer and seller agree upon.
  4. Home owners choose the escrow company. Realtors and lenders make recommendations to the home owner as to which escrow company to choose.
  5. Escrow must be “opened” within 3 days of an accepted offer by a seller. “Opening escrow” is the process of hiring the escrow company and providing escrow instructions and all deposit monies to them. Realtors open escrow for purchase transactions. Lenders open escrow for refinance transactions. But any party in the transaction may open escrow.
  6. Escrow companies charge for their services. Both the buyer and seller split the cost of those services the vast majority of the time. Escrow fees are calculated based on the price of a purchase transaction and are a fixed cost for most refinance transactions.
  7. Buyers, sellers, realtors, lenders, and escrow agents all work as a team to get the transaction finalized. Each party has various contractual obligations and responsibilities— nothing is more enjoyable than when all parties are working in sync as a team!
  8. Escrow must “close” at the agreed upon time period. Closing escrow means all requirements have been met, the title of the property has been transferred to the buyer, and a new deed has been recorded at the county.
  9. Legal consequences may be imposed if a buyer or seller does not meet all their contractual obligations within the agreed upon time period
  10. An escrow company is in charge of the handling monies as well as the signing of loan documents with the buyer. Buyers give their earnest money deposit, down payment, and closing costs to the escrow company. Sellers receive the proceeds of the sale from escrow. Escrow disburses commissions to the agents.

Home buyers are the most excited at the beginning of the home buying process, the most nervous during the escrow period, and the most relieved when escrow closes. Escrow officers are an integral part of the team when buying, selling, or refinancing a property. Remember your friendly escrow officer and consider a thank you call or email after escrow closes. They will absolutely love you for it.