Insurances - Chapter 13 Flashcards
Mortgage Insurance
Mortgage insurance is a form of protection for the lender in case the borrower defaults (doesn’t pay) their mortgage debt obligation. This insurance is not used to cover the borrower in terms of their monthly payment. Mortgage insurance is used as a last recourse after a non- paying borrower is foreclosed upon and the lender sells the home to obtain the principal balance owed on the home by the borrower.
The purpose of mortgage insurance is to fill the gap between what the foreclosed upon property sells for, and what the lender is owed. If the home sells for enough money to cover the debt, the lender will not require compensation from the insurance. If the home sells for less than what is owed, the insurance should cover the difference.
Conventional Mortgages - Private Mortgage Insurance, PMI
In general both conforming and non-conforming conventional mortgage loans require mortgage insurance if the borrower has an LTV ratio higher than 80% (equity < 20%). So if the borrower has a $100,000 loan amount and their current equity position is less than $20,000, they are typically required to carry mortgage insurance on the loan.
The type of mortgage insurance used for conventional mortgages is called private mortgage insurance (PMI). Remember, conventional mortgages in their most basic sense are considered private mortgages because they’re not government loans. You can use this as the key to link conventional mortgages to private mortgage insurance.
Calculating PMI
The PMI is calculated by multiplying the PMI factor by the loan amount and then dividing the result by 12 to determine the monthly PMI payment requirement. This monthly PMI payment will be required every month until the borrower reaches at least 80% LTV.
The loan amount is $100,000. Their PMI factor is 0.37% (or 0.0037). $100,000 X .0037 = $370 ÷ 12 = $30.83. Based on this equation, the borrower will be required to add $30.83 to their monthly payment until they reach at least 80% LTV.
PMI Cancellation Act
The Homeowners Protection Act (HPA) is also known as the PMI Cancellation Act, and provides the opportunity for the borrower to request that their PMI be canceled at 80% LTV. This is approved/allowed, provided they’ve been on time with their payments and two other factors:
• The home’s value has not declined since the time the loan closed.
• There are no new liens on title since the time the loan closed.
Verifying these two factors will incur expense for the borrower in the form of a new appraisal and title work. Because of these expenses, many borrowers will allow for the PMI to remain until the LTV reaches 78%. At 78% the lender is obligated under the rules of the PMI Cancellation Act to remove the borrower’s PMI requirement.
HPA
The Homeowners Protection Act (HPA) also known as the PMI Cancellation Act.
Upfront Mortgage Insurance Premium - UFMIP
Up Front Mortgage Insurance Premium is a one-time fee on FHA loans, paid by the borrower at closing. UFMIP is a standard 1.75% of the loan amount. It can be paid with funds at the closing table or rolled into the amount financed.
As an example, if our borrower receives a $150,000 loan, the UFMIP for the loan would be $2,625 ($150,000 X 1.75%). The borrower could pay the $2,625 at closing or roll it into the loan and thus pay the UFMIP as part of the monthly payment.
Mortgage Insurance Premium - MIP
Mortgage Insurance Premium (MIP) - sometimes referred to as monthly mortgage insurance premium - is the FHA mortgage insurance that must be paid monthly by FHA borrowers. Like PMI, the premium amount is calculated annually and then distributed equally across the 12 monthly payments.
The Two FHA loan Catagories and MIP (Chart on pg. 168)
The FHA has divided their loans into two general categories based on loan term: those with terms beyond 15 years and loans with terms 15 years or less.
They use something called bps (basis points) to describe the MIP factor. Basis points (bps) is just financial lingo for 1% of 1%. So if one percent is written mathematically as .01, 1% of 1% is .0001, or one one- thousandth.
Basis points differ for each category of loan (see chart on page 168).
For loans with LTVs of 90% or less, borrowers are only required to pay MIP for 11 years. If the LTV at closing is higher than 90%, the borrower will be required to pay MIP for the full term of the loan.
VA Loans - Funding Fees, Guaranty And Entitlement
Mortgage loans provided by the United States Department of Veterans Affairs carry a component that protects the lender in case of default, but it’s not called mortgage insurance. Instead, the VA refers to a system involving entitlement, guaranty and funding fees. At the end of the day, it all functions pretty much like mortgage insurance, but it’s called entitlement and guaranty, and the borrower pays for it through the one-time VA funding fee.
USDA Loans - Guarantee And Annual Fee
While USDA offers multiple loan programs, the Guarantee Fee and Annual Fee, along with the protection they provide to the lender, are only available for loans offered through their guaranteed loan program (i.e., Single Family Housing Guaranteed Loan Program - SFHGLP).
The protection that USDA provides to lenders with these loans is the same methodology seen with other mortgage insurances. Should the borrower default on the loan and the lender sell the home at a loss, they may be able to recoup (get back) a portion of the loss through payment from the USDA.
The USDA is able to fund this protection through payment of the borrower’s initial Guarantee Fee which is paid at closing (1% for purchase and refinance loans) and Annual Fee (0.35% of the unpaid balance).
The Annual Fee does not come due until 12 months after loan closing and is paid in monthly installments. As an example, if a borrower has an unpaid balance of $50,000 after the first year of making payments on their loan, the Annual Fee requirement would be $175 ($50,000 X 0.35%).
Therefore $14.58 ($175 ÷ 12) would be added to each loan payment for the next year.
Hazard Insurance
One of the things that a mortgage lender will absolutely require of their borrower is hazard insurance protection. To be clear, hazard insurance protects the home in the event of natural disasters like storms, fires, floods and earthquakes.
If one of these things happens and the home is damaged, the hazard policy covers the cost of repair or provides some other remedies such as reconstruction services.
Basic Homeowner’s Insurance (HOI)
In most cases, a basic homeowner’s insurance (HOI) policy will include the hazard insurance coverage for the natural disasters like storms, fires, floods and earthquakes.
If the property is in a high-risk area for a specific type of hazard, that coverage may not be available as part of the basic policy and a special hazard policy may be required for that specific hazard
HOI Simplified: Replacement Value
The law allows lenders to require that borrowers carry hazard insurance on the mortgaged property, but only to the extent of the replacement value of the home. Replacement value is the amount of money needed to rebuild the home where it stands.
Replacement value does not take into account property location or market value - only the cost of the materials, labor, plans, permits, etc. It’s entirely possible for a small home in an exclusive community to have a low replacement value of $75,000 even though it could sell on the open market for $750,000. Meanwhile a large home in a declining neighborhood might sell for $25,000, but cost $250,000 to rebuild.
This conflicting dilemma is one that you should be aware of because as an MLO, you may encounter a borrower attempting to finance a home which cost them a minimal amount, but will require a significant amount of hazard insurance due to its high replacement value.
HOI Simplified: Force-Placed Insurance
Force-placed insurance is hazard insurance obtained by a servicer on behalf of the creditor of a mortgage loan when no hazard insurance coverage is present on the mortgaged property. This could happen if a borrower allows their hazard insurance to lapse after the loan closes.
Servicers may not charge a borrower for force-placed insurance unless there is reason to believe that the borrower did not meet the mortgage contract requirement of maintaining their own hazard insurance on their property.
Before the servicer can place and charge for such insurance the borrower must be provided with a Force-Placed Insurance Notice. This written notice must be delivered at least 45 days before the servicer assesses an insurance charge.
Force-Placed Insurance Notice
This written notice must be delivered at least 45 days before the servicer assesses an insurance charge and contains the following:
• The date of the notice
• The servicer’s name and address, as well as the borrower’s name and address
• A statement that requests the borrower to promptly provide hazard insurance information for the property and identifies the property by its physical address
• A description of the requested insurance information and how the information may be provided
• A statement that the borrower’s hazard insurance is expiring or has expired, and that the servicer does not have evidence of hazard insurance coverage past the expiration date
• A statement that hazard insurance is required on the borrower’s property, and that the servicer has purchased or will purchase insurance at the borrower’s expense
• A statement that insurance the servicer has purchased or will purchase may cost significantly more than insurance purchased by the borrower, and may not provide as much coverage
• The servicer’s telephone number for borrower inquiries
