Your credit score has always been a major factor in determining whether you will qualify for a mortgage. However, if you have to purchase private mortgage insurance in addition to your mortgage, your credit score is even more critical. Credit score requirements for PMI are often stricter than those for mortgages without PMI.
Your credit score and down payment will determine what kind of loan and PMI you will need. For example, if you have a credit score of at least 580, you can get an FHA loan and only put 3.5 percent down. If your credit score is between 500 and 579, you can get the same FHA loan, but you will have to put 10 percent down. If you have great credit, you may qualify for what's known as a "piggyback" loan. This option allows you to pay nothing down but still avoid paying for PMI. If you have time to increase your credit score before you apply for a home loan, it's a good idea to do so.
Potential homeowners who do not put up at least a 20 percent down payment on a conventional mortgage must pay PMI, which is designed to reduce risk to lenders of default by the homeowner. The typical cost of PMI can range between about one-half of one percent to one percent of the total mortgage loan. Government-guaranteed home loans carry their own insurance and therefore do not require PMI. PMI can be assessed as a monthly payment in addition to your mortgage or paid as a lump sum on closing.
Home buyers' credit scores have a direct bearing on the PMI interest rates they must pay. Higher credit scores translate to lower PMI interest rates, and vice versa. In addition, PMI interest rates vary according to the interest rate for mortgages -- higher mortgage interest rates are frequently associated with higher interest rates for PMI. Mortgage interest rates for borrowers with lower credit scores are higher than those for borrowers with better scores. Jumbo mortgages also carry higher interest rates than mortgages for smaller amounts.
In most cases, borrowers pay the cost of PMI; however, some lenders offer lender-paid PMI. Lender-paid PMI incorporates PMI costs into the mortgage for a home in the form of a higher interest rate than the loan would otherwise have. The lender pays part of the added mortgage costs to the mortgage insurance company. Interest paid on mortgages including lender-paid PMI is deductible on federal income tax returns; buyer-paid PMI is not tax deductible. Under the Homeowner's Protection Act of 1998, lenders must cancel PMI once the outstanding balance falls under 78 percent of the original property value for loans that are not high-risk. PMI for high-risk mortgages must be canceled when the outstanding balance falls under 77 percent of the original property value.
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