If you want to avoid PMI altogether, you must put 20% down when you purchase the property. In the recent past, many times people would get a 2nd mortgage for that 20%, but many lenders have done away with “piggyback” loans — so more people are now buying homes and paying the PMI because they were not putting 20% down.

If you only put 5% down and are now wondering “at what point am I able to get rid of PMI” the answer is that when you reach a point where you think you have 20% equity in your property, you should contact your mortgage servicer. They will be able to tell you what their requirements are for “getting rid of PMI” and will usually send you a package of instructions that involve getting an appraisal and completing some forms.

Because the process is different between lenders, you need to speak with your current mortgage servicer to be sure. There is also a chance that they will drop the PMI automatically, but I rarely see that happen.

When dropping PMI, the factors that your lender will consider are the current value of your home and if you’ve made your mortgage payments on time. Be sure not to spend the money on ordering an appraisal to determine your property value until you have spoken with your lender about the process.

If you have an FHA loan — two things must happen in order to cancel mortgage insurance — the UFMIP account must be depleted completely (this takes 60 months from when you took out your loan) and you must have paid down the principal to 78% of your original loan balance. FHA monthly mortgage insurance does not take in to account any property appreciation that may have occured.

And the answer is “no”.

What this tells me though is that FHA has done a good job of marketing the FHA streamline program because people are starting to ask for it by name.

The FHA streamline refinance program was designed to allow eligible FHA borrowers to take advantage of lower interest rates when they are available without having to completely re-qualify for a new loan – ON THEIR FIRST LOAN ONLY.

When doing an FHA streamline refinance on your first mortgage, if you have a second mortgage, the second mortgage is not eligible for the FHA streamline refinance program. FHA doesn’t insure second mortgages, so your second mortgage is not FHA insured – thus, it is not eligible for the FHA streamline program.

When you participate in the FHA streamline refinance program and you have a second mortgage, the lender of your second mortgage must agree to subordinate the second mortgage – meaning they have to agree to remain in 2nd position while you refinance the first mortgage.

It is getting more difficult to get lenders who are holding second mortgages to allow people to refinance their first with the FHA streamline refinance program, but it is not impossible. Each situation is different – you cannot get an answer on your situation until you speak with the holder of your second mortgage.

Can you streamline your second mortgage?

No.

But you can still participate in the FHA Streamline program if you have a second mortgage…

Until six or eight months ago, private mortgage insurance was out of favor as people eager to get into the roaring housing market took adjustable-rate mortgages or “piggyback” loans or some other exotic form of financing. But as the market has cooled and lenders have tightened their standards, many people who want homes, especially first-time home buyers and those with little money for down payments, are choosing traditional fixed-rate mortgages backed by private mortgage insurance, or PMI.

The insurance costs the borrower a monthly fee, typically a set percentage of the total mortgage loan. If the borrower can’t repay the loan, the insurance kicks in and the lender gets some of its money back. Because of the guarantee, lenders are more willing to write the mortgages.

It helped Manuel Santa Cruz, who closed on a home last month in Tucson, Ariz. Santa Cruz, a consultant for a biotech company, said he and his wife Michelle were happy to sign up for PMI, which will cost them $150 a month, because it allowed them to get the kind of mortgage they wanted. “We didn’t have a lot of money for a down payment, but we had enough income to handle the monthly payments,” he said. “And we felt strongly that a fixed rate would be easiest for us to handle.”

Pat Lamb, president of the mortgage division of First National Bank of Arizona in Scottsdale, which wrote the mortgage for the Santa Cruzes, said that until about six months ago, most home buyers who didn’t have the money for a 20 percent down payment were opting for piggyback loans.

Those loans actually involve two mortgages. In an 80-10-10 configuration, the home buyer puts down 10 percent of the home’s value in cash, gets a primary mortgage for 80 percent and then takes a second mortgage for 10 percent.

The advantage of this approach is that the interest on both mortgages can be written off at tax time. The disadvantage is that the rate on the second mortgage generally is at least 2 percentage points higher than on the first and can rise with market rates.

Found here.

Lenders can make it easy to buy a house without the traditional 20% payment, but that doesn’t mean doing so is always to the advantage of the new homebuyer. As you’ve doubtless been reading lately, lenders such as New Century and Accredited Home Lenders (Nasdaq: LEND) helped lots of buyers get into a home, but now many of them are facing default and potential foreclosure.

So let’s look at five reasons why it’s better for your pocketbook if you scrimp and save and delay your home shopping until you can make that traditional down payment.

1. When you approach a lender with a 20% down payment in hand, you can typically negotiate better loan terms. You’ll often get a wider choice of loan options, and you’ll be in a better position to optimize your loan rates, terms, and other features. The bottom line — you’ll save money.
2. Without a 20% down payment, you could be asked to pay private mortgage insurance, since the lenders’ number-crunchers have determined that people buying a home without the traditional down payment tend to be more likely to default. Unlike your mortgage payments, the PMI money goes straight to your lender with little advantage to you. It does not reduce your loan interest or principal, and it’s not tax-deductible.
3. Some lenders let homebuyers avoid paying PMI by taking out a second mortgage loan, often called a “piggyback.” In most cases, you’ll have one loan for 80% of the home’s cost and a second covering as much as the remaining 20%. You get tax advantages that you wouldn’t realize with private mortgage insurance — specifically, a deduction for your mortgage interest — but that second loan typically comes at a steeper interest rate than the first.
4. Without a sizable down payment, you’ll have very little to no equity in your home for a long time. For some buyers, home equity can provide much-needed peace of mind that they’ll have a source of cash in an emergency.
5. Without any equity, you might also end up in a truly unfortunate position if home prices drop in your neighborhood. In that situation, you could owe more on your mortgage than your home is worth. That may not be a problem if you’re planning to sit tight for a long time, but if you’re suddenly forced to move, you’ll have to come up with the difference. You could feel a serious squeeze on your finances as a result.

Maybe now you’re convinced that saving up that 20% first is a good idea, but in some regions of the country, average home prices are high enough to make putting away 20% very difficult. In that case, shift to Plan B — save as much as you can, even if you don’t think you can reach the 20% goal. By having at least some money to put down, you’ll be able to drop your PMI policy sooner, since you’re required to pay for that insurance only until you have 20% equity in the house. And if you have a second “piggyback” loan instead of PMI, you’ll minimize the amount of money you have to borrow at higher interest rates. Your diligent savings habits might even make it possible for you to accelerate your payments and knock out that second loan pretty quickly. You’ll also move into your house with a little bit of equity, and maybe a little more peace of mind.

Found here.

This month, the mortgage payment on Booker’s Chicago home rose $200, to about $1,300. It’ll go up again in September. He wants to refinance, but he fell behind on payments after his wife died of cancer in 2005, so no lender wants to take the risk.

“I’m just trying to hold onto my house until I can figure out something else to do,” says Booker, 58, a former rail-car inspector who’s on disability.

Since the start of the year, more lenders have been shutting their doors to people such as Booker, just as those homeowners’ interest rates are rising. They’re slashing the “Bad credit? No problem” types of loan programs, known as subprime, that helped fuel the housing boom. And they’re raising the bar for homeowners and first-time buyers to qualify for new loans.

The trend accelerated last week after federal regulators proposed stricter guidelines for banks that make subprime ARMs (adjustable-rate mortgages). The move followed Freddie Mac’s decision to drastically raise the criteria for the subprime ARMs it would buy and to require better proof of a borrower’s finances.

The industry is reacting to the waves of subprime borrowers who’ve defaulted on their ARMs in recent months. The tighter controls should help prevent future borrowers from getting in over their heads and protect them from predatory lenders. But the sudden shift in lending rules could also threaten the homeownership gains made by families since 2000, weaken the recovery of the housing market and potentially slow the economy.

“It will be a very severe correction (in the subprime market), and I think it will last anywhere from six to 12 months, during which many of the lenders who have operated in this market will gradually get pushed out of business,” says Chris Flanagan, a managing director for JPMorgan.

Nearly two dozen subprime lenders have already closed their doors or been purchased, and a dozen more are in trouble, according to a report by Credit Suisse.

To stem their losses, lenders nationwide are notifying mortgage brokers to cancel loan programs. Many of them are:

•Reducing loans for 100% of the purchase price.

•Reducing the number of “piggyback” loans, whereby a lender makes one loan for 80% of the purchase price and a second loan for the remaining 20% of the price at a higher interest rate.

•Raising the required credit score.

•Requiring more documentation of a borrower’s income and scrutinizing the appraisal and comparable-home sales data.

“Some of these companies are yanking away six, eight (loan) products at a time, and the reps are just hanging on the phone with their mouths open, saying, ‘What are we going to sell?’ ” says Dave Tucker, owner of MileHighMortgage.com in Castle Rock, Colo.

That’s partly why he can’t help Anita Furakh and Bobby Pervez this time. Tucker helped them buy their first home near Denver two years ago with an ARM that covered 100% of the $195,000 purchase price. The young couple, with two children, made their payments on time until December, when Pervez traded in his car for a new one. That month, they were late on their mortgage. The timing couldn’t have been worse. They needed to refinance their mortgage before the rate started rising this month. But their home’s value hasn’t gone up, and their credit score has gone down.

“I don’t know what I’m going to do,” says Furakh, 24, who was bathing and feeding her two daughters after work. “I’m trying to work on my credit, but sometimes you can’t be that good. I’ve got two jobs. I’ve got two kids. Sometimes, I am just late.”

The industry was caught off guard by the surge in delinquencies last year. ARMs made to people with shaky credit in 2005 and 2006 are defaulting at two to three times the rate of loans from 2003 and 2004, according to First American LoanPerformance. Because the interest rates on these loans are usually fixed for the first two or three years, and then start rising, “The worst is still to come,” says Brenda White, a managing director at Deloitte & Touche.

So far, the deepening crisis seems confined to lenders who made riskier loans and hasn’t spread to the broader financial markets, which hold up to $1.5 trillion in subprime loans. Still, as many as 7% of those loans will go into foreclosure, resulting in losses as high as $70 billion, Flanagan estimates. The Center for Responsible Lending projects that 2.2 million homeowners with subprime loans will lose their homes.

Sharing the blame

Thousands of homeowners are already feeling the pain. In January, the Homeownership Preservation Foundation, a non-profit financial counseling group, received 4,500 calls to its toll-free hotline (888-995-HOPE or 888-995-4673), 150% more than last summer. The callers are in financial difficulty and often trying to stave off foreclosure. Equally alarming was that 16% of the callers from October to December didn’t know what kind of mortgage they had, according to the foundation.

Experts say there’s plenty of blame to go around. During the real estate boom, lenders began offering an array of loans to borrowers with poor credit histories. They let many borrowers finance 100% of the purchase price, often asking for little or no proof of income or assets. Last year, 43% of loans required little or no documentation of the borrower’s finances, according to First American LoanPerformance. These “stated-income” loans have earned the nickname “liar loans.”

“When these loans were introduced, they made sense, given the relatively strict requirements borrowers had to meet before qualifying,” according to an April 2006 report by the Mortgage Asset Research Institute. “However, competitive pressures have caused many lenders to loosen these requirements to a point that makes many risk managers squirm.”

The lenders typically use a network of independent brokers who sell loans from a variety of lenders for a commission. The brokers, some of them new to the industry, some of them unlicensed, were responsible for explaining the complex terms of the loan to the borrower. This led to allegations of predatory lending — pushing high-cost loans that are plainly unsuitable for a person’s financial resources and prospects.

Take Betty Jean James, 70, a retired glass inspector living on Social Security. Two years ago, she refinanced the Chicago home where she’s lived for 25 years. The rate on the loan started rising after the second payment. The payments started at $1,032 but have since climbed to $1,761. “I fell behind two months ago,” said James, who is facing foreclosure. “It just got too high.” Though James signed the loan document, which clearly states that the interest rate is adjustable, she recalls that the mortgage broker “explained to me he could refinance the house, and he did. He didn’t explain the interest rate could go up.”

Some borrowers, meantime, contracted real estate fever and took out loans they didn’t fully understand or stretched their budgets too thin. Some lied about their income on their loan applications, sometimes with a wink or a little help from their broker on a stated-income loan.

Casey Serin is a classic case. Serin, a Sacramento website designer who was profiled in USA TODAY in October, has admitted that he lied on his loan applications to buy eight houses in four states as investments. He hoped to flip them for a quick profit, but he made too many newbie mistakes. He sold three of the homes, the lenders foreclosed on two, and he’s still trying to sell the remaining three.

When the real estate market was on fire, such excesses and abuses were often overlooked. If a borrower ran into trouble and fell behind on a payment, it was easy to refinance or sell the property.

Everything changed after the market peaked in August 2005. “For sale” signs swung in front yards for months, and home prices started falling. Borrowers who fell behind on their loans sometimes owed more than their homes were worth. Or they couldn’t sell their property before the lender foreclosed and drove neighborhood prices down further.

In 23 metro areas where home prices fell 4% or more at the end of last year, at least half the subprime ARMs will reset to higher rates this year or next, according to an analysis by First American LoanPerformance for USA TODAY. (See chart.)

In Grand Rapids, Mich., for example, home prices fell 4% at the end of last year, and 56% of homeowners with subprime ARMs will see their rates reset by the end of next year. “I’ve got a handful of clients right now I want to help, but I can’t,” says Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich. “They are better off selling their homes.” But that’s hard in Michigan, which has one of the highest foreclosure rates in the country.

‘One of the real tragedies’

First-time home buyers are also vulnerable. On average, first-time buyers made only a 2% down payment last year, the National Association of Realtors says.

“One of the real tragedies of this is that the folks who became first-time buyers because of this expansion of credit, many times they were first-time buyers not just themselves, but for generations of their families,” says Jim Wheaton, deputy director of Neighborhood Housing Services of Chicago, a non-profit counseling and lending service. “But if they lose that home to foreclosure, given the impact on their credit, the appreciation of home prices, and the fact that their incomes generally are not rising that quickly, they are losing their only opportunity at homeownership.”

Yet the lack of affordable housing is one of the reasons subprime ARMs became so popular. With a starting “teaser” rate, these loans let people with little money for a down payment still buy a home. Last year, 7% of buyers used a subprime ARM, according to the Mortgage Bankers Association.

It’s too soon to know how many buyers won’t qualify under the tighter criteria and how the trend will hamper this year’s expected housing recovery. “It’s a tough situation,” says Dick Syron, CEO of Freddie Mac.

Under Freddie’s new rules: If a subprime borrower wanted to buy the U.S. median-price home at $210,600 with a two-year ARM, the buyer would have to qualify not only at the starting monthly payment of $1,619, at 8.5%, but also at the maximum payment of $2,412 a month, at 13.5%.

“There’s a very delicate and difficult balance between getting as many people into houses as you can,” Syron says, “and at the same time putting people into houses they can’t keep unless home prices are appreciating or interest rates are very low.” Hanging in that balance: nearly 400,000 homeowners with subprime ARMs who, like Booker in Chicago, have already missed at least one loan payment and have a lot fewer options now.

Found here.