Mortgage Insurance Returns: Is It Right for You?

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Private mortgage insurance was all the rage when housing prices were high and down payments were tiny. But ever since the housing bubble burst, people seeking to buy a home with less than 20 percent down -- especially in declining markets such as Arizona, California, Florida, Michigan and Nevada -- had nowhere to turn for a loan other than the Federal Housing Administration (FHA).

But starting in March 2010, private mortgage insurers Genworth, MGIC and Radian opened their doors again to low down payments, even in declining markets.

Don't throw a party just yet, though.
You'll still need to tap the FHA if you want to put down less than 90 percent and your credit score is below 680. But if you're a first-time home buyer with a credit score above 700, you may be able to get a down payment as low as 3 percent, as long as you're not in one of the restricted markets. The low down-payment deal is being offered by MGIC, but only in its non-restricted markets. Restricted markets include Arizona, California, Florida, Nevada and some parts of Georgia, Illinois, Michigan, New York and New Jersey. In the restricted markets, you'll need to put down at least 5 percent and have a credit score 720 or above to purchase a home. If you want to put down only 10 percent in a restricted market, you need a credit score of at least 760 for MGIC.

Right now, MGIC has the most liberal down payment rules. But to take advantage of those lower down payments and lower credit score policies, you have to be purchasing a house in one of the non-restricted markets. Genworth's new rules allow you to put down just 5 percent anywhere in the country. This is because the company changed its definitions for retail and on non-retail origination. You usually can find the best deals at Genworth's retail locations, where you can get a loan with as little as 5 percent down and a credit score of 680 or above for the purchase of a primary residence.

Radian also will make loans anywhere as long as you work with one of its trusted lenders that have low delinquency rates. Radian requires a credit score of at least 720 if you want to put down only 5 percent for a full-documentation conforming loan.

The rules at the FHA also just got stricter. If you want to put down just 3.5 percent you'll need credit score of at least 580 or above. If your score is below 580 you'll have to put down at least 10 percent. Another big change is that with an FHA loan, seller concessions can not be higher than 3 percent. Previously sellers could help buyers with up to 6 percent of the purchase price in concessions or closing costs. With that change, FHA rules conform to industry standards.

FHA also raised its upfront premium from 1.75 percent to 2.25 percent, but that premium can be financed as part of the mortgage. The FHA also asked Congress for authority to raise its maximum monthly insurance fee from 0.5 percent to 1.55 percent, but it's only expecting to raise that premium to 0.9%. With these changes FHA's and PMI's insurance rates will be competitive. Depending on your loan plans in some scenarios, FHA will be cheaper and in others, PMI will be cheaper.

If you're looking to buy a house, it pays to shop lenders to find out what terms they are offering. If one lender turns you down because they won't accept just 5 percent, don't give up. There are loans out there, they may just take a little work to find them. If you do want to buy with just 5 percent down, the most important thing you can do is improve your credit score. Not only will you then be able to find a 5 percent down loan, you'll also be able to get a better interest rate.

Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to Improving Your Credit Score and The 250 Questions Everybody Should Ask About Buying Foreclosures.
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