Most of my home buyer clients wistfully wish they had 20% of the price of the home they want to use as a down payment. Lots of reasons, but the main one is that once you can hit that 20% mark, you don’t have to tack on extra monthly PMI insurance charges to your mortgage. As I stated in a prior post, you don’t have to have 20% down. But it brings up another point: the insurance industry looks at market areas to see how risky or how stable they are. PMI Insurance of America has a lengthy just released pdf talking about their list of best and worst. And the criteria they used. This is unlike any silly Forbes or other article you can read, because this gets to the heart of your home buying transaction. So how does PMI of the US see NE Ohio?
We fall into the 0% to 10% risk category. If you look at the map on page 11 of 12 in this pdf they put out, you will see a rather interesting picture, and one that may differ from a lot of the information you read or hear in the media.
I found it very interesting that both coasts were the riskiest. Most of the country is in the same pretty sky blue area that says low risk.
I would still encourage everyone to use a professional to help you figure out what is a better or not so good investment if you plan on buying and moving in less than five years. Or if you plan on buying and renovating the home to sell as an investor. But if you plan on buying and living in your new home for a while, I would think this is calming news?
In reality, they list Cleveland in the top ten of most stable markets. How about those apples? Peace out – 3C
6 responses so far ↓
1 Russ // Feb 18, 2009 at 10:45 am
Yesterday on the Diane Rehm show a caller asked a panel why we’re seeing problems with all these foreclosures cascading into banking issues when people are paying PMI — what exactly is being insured?
The folks on the show had no answer — can you tell me what PMI does? What happens when someone still under 20% equity defaults?
2 Carole Cohen // Feb 18, 2009 at 4:11 pm
Hi Russ, great questions & there is a lot of confusion over this so I’m glad you asked. It sounds like the caller was keying into the media focus which has been a bit incorrect. Some stories came out in the press that only 20% loans were being done now.
Foreclosures will occur when you can’t make enough money per month to pay the mortgage and that fact doesn’t change whether you put 20% down 10%, 5%, or 3%. The one difference, to me, is the zero down mortgage loan; I think that was the big key to foreclosures, at least in our area. When people don’t have skin in the game (a down payment) they don’t stand to lose money if they default on the loan. Now someone who makes a ton of money and put 20% down may still see that as a low enough amount so that walking away is better than trying to continually pay catch up.
PMI insurance exists for all loans where the buyer does not put at least 20% down. It’s an additional form of insurance, let’s use 26 bucks a month tacked on to the mortgage as an example. For 26 bucks you can get the loan and the loan officer feels (or should) you are a good candidate for the monthly payments even without a twenty percent downpayment.
When you look at loans, look at the credit, debt to income ratio and salary of the person getting the loan. Everytime a loan is less than 20% there is an extra fee required as an insurance policy. I’ll try to get a loan officer to explain this for us in more detail.
But there really is no difference between a ’20 percenter’ who defaults and a 3% person who defaults. End result is the same.
In our area we had more loans written and allowed that shouldn’t have been granted. A lot of these loans were zero down or maybe 3% (which most of the fannie or freddie loans are — 3% or 6%.
To me,the real reason there were so many defaults (besides bad loans) is that people were not willing to do any financial planning, they lost their jobs, became ill and couldn’t work or a combo there of. Let’s just deal with the bad financial planners. They were used spending x amount of money a month. Maybe the electric bill was a bit late but now that they have a home, if the mortgage payment is 3 months late, things begin to spiral. If they didn’t have any down payment money, maybe they don’t sit down soon enough and come to the realization that they need to spend less on other things and start saving money for their mortgages. This is the mentality we had up until or crisis last fall. Now, if there is anything good coming out of our economic situation, it’s that people may be starting to live differently.
Basically, PMI is an insurance policy for the lender who is taking a bit of a risk on you if you obtain a loan with less than 20% down. It protects the lender if you default.
This may have been a bit rambling but I hope it got to your question! If not let me know.
3 Russ // Feb 23, 2009 at 4:09 pm
“Basically, PMI is an insurance policy for the lender who is taking a bit of a risk on you if you obtain a loan with less than 20% down. It protects the lender if you default.”
This is close to the answer to my question. If PMI is an insurance policy, do they pay off the mortgage to the bank when the homeowner defaults?
4 Carole Cohen // Feb 23, 2009 at 4:40 pm
Russ no, they pay off the lender and PMI only has a 20% insurance policy on the home if it defaults so the payback wouldn’t be more than 20% of total value. .
5 Russ // Feb 23, 2009 at 4:55 pm
But this does mean when someone under PMI defaults the bank gets a house and 20% of the value of that house.
6 Carole Cohen // Feb 23, 2009 at 5:01 pm
The bank winds up owning real estate if you default; they will get some compensation from the PMI insurance but when all is said and done, they will still own property. With or without PMI.
If you have a mortgage with Wells Fargo (as an example), and you default on your payments, they own the house. If you have an FHA loan, then Fannie Mae owns the house if you default.
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