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Unformatted text preview: . INSURANCE ISSUED
Many references have been made to issuance of insurance by the PMI company on mortgages, but what is the coverage of the insurance? First, it should be made very clear that PMI insurance is not the same as the insurance issued by FHA. PMI does not insure 100 percent of the mortgage, but only a portion of the mortgage. What portion of
6-18 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 6: HARD MONEY LOAN & CONVENTIONAL LOANS
the mortgage is insured? The PMI companies are limited by law to the maximum percent of the loan they can insure. The normal protection for a fixed–term, fixed rate mortgage is between 20 and 30 percent, and for an adjustable–rate mortgage the coverage is between 20 and 35 percent. This protection is available on a high loan–to–value ratio loan of 80 percent or more and issued almost exclusively on 90 to 95 percent loans. With this type of coverage available, institutions that are limited to a maximum loan–to–value ratio of 75 percent are able to make 95 percent loans. With the 25 percent coverage on a fixed– term, fixed–rate 95 percent loan on a home selling for $70,000, the lender would have the following risk: Sales price Loan amount–95 % Borrower's down payment Loan amount PMI Coverage Total PMI coverage $70,000 $66,500 $ 3,500 $66,500 X25% $16.625 Thus, the lender's exposure on the property would be the sales price, less the down payment, less the insurance coverage, or: $70,000 – $3,500 –$16,625 = $49,875 When the items are subtracted from the sales price and the lender's exposure of $50,000 is divided by the sales price, the lender is actually making a 71.25 percent loan. $48,875 / $70,000 = 71.25% In addition to the 25 percent coverage on the fixed–rate loans, many of the PMI companies offer 12–, 16–, 17–, 20–, 22–, 25–, and 30–percent coverage. In regard to the adjustable–rate mortgage, many of the companies offer 20...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10