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Do People With Bad Credit Have to Pay Mortgage Insurance?
By Francine L. HuffMortgage Credit Problems Columnist
It isn't impossible
for people who have bad credit to qualify for a mortgage, but when they do,
many of them find themselves having to pay for private mortgage insurance (PMI)
on their home loan. This is not a direct result of their bad credit, but
because people with large amounts of debt often don't have enough cash on hand
to make a 20% down payment when closing on a mortgage.
PMI Protects Lenders
PMI is extra insurance that lenders require for borrowers
who need a mortgage for more than 80% of the value of a home. PMI protects
lenders in case a homeowner defaults on the mortgage. Anyone who takes out a mortgage
for more than 80% of the value of their home will pay PMI, not just people with
bad credit. However, loans that allow down payments of less than 20% are
getting harder for all homebuyers to obtain, not just people with bad credit.
How to Cancel PMI
Just because homeowners get saddled with PMI at the
beginning of their loans doesn't necessarily mean they can't cancel it.
Homeowners--including those with bad credit--who start out with PMI on their
home loans can request to have it canceled when the amount of equity in their
home rises to 20%. If a homeowner's equity reaches 22%, lenders are usually
required to automatically cancel PMI.
Borrowers must be current on their mortgage payments to
cancel PMI. Some lenders may even require homeowners to have an appraisal done
to show that the value of their home hasn't dropped and that they don't have a
second mortgage. Also, some mortgages, such as high-risk mortgage loans, have
different requirements for cancellation, so different rules may apply. It's
important to ask lenders about their PMI policies before closing on a home loan.
Rising Home Values
In some cases, an increase in the value of a home could mean
an end to PMI payments. That increase could be due to an increase in home
values in a particular area or to improvements made in a home. Although lenders
aren't required to use current property values, it can't hurt for a homeowner
to ask.
Ultimately, having bad credit doesn't automatically mean a
homebuyer has to pay PMI, but anyone who isn't able to make a 20% down payment
when purchasing a house will likely end up paying the extra insurance.
Borrowers must make sure their monthly budgets can cover their mortgage, taxes,
insurance, and PMI before they close on a loan, so they can avoid problems down
the line.
Sources:
Federal
Reserve Bank of San Francisco
Housing
and Urban Development
About the Author
Francine L. Huff is a
freelance journalist and the author of The
25-Day Money Makeover for Women. She
has appeared on a variety of TV and radio shows.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
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