Mike’s Real Estate Show

Mortgage Insurance Changes in California and Other Restricted Markets
 

First off, what is mortgage insurance (MI)?  It is insurance written by an independent mortgage insurance company to protect the mortgage lender against loss incurred by a mortgage default, thus enabling the lender to lend a higher percentage of the sales price. 

I do believe the advent of mortgage insurance, as we know it, came about in the 1950’s.  Prior to that you had to have a 20% down payment when you bought a house, or you had to do an FHA loan.  There just were not a lot of options.

Back in March 1998, Ted Appel of The Press Democrat interviewed me about the advantages of doing 80-10-10 loans or 80-15-5 loans instead of a regular loan with MI.  Prior to the fall of 1998 you literally had to refinance to get rid of your mortgage insurance.  I know, I had a good interest rate at the time, but if I refinanced just to get rid of my mortgage insurance my payment was going to go up!  So this article from March 14, 1998 was very timely.  The purchase market was just at the beginning of what was going to be seven years of straight up property values. 

In September/October of 1998 the Homeowners Act of 1998 passed.  You could now drop your mortgage insurance after two years if you had a good payment record and you could demonstrate, with an appraisal, that you now owed less than 80% loan-to-value.  MI was basically dead.  It was still not tax deductible and it was just easier to do two loans, an 80% first mortgage and the remaining was done as a second (as an equity line of credit or a fixed home equity loan).  The rates on the seconds were very appealing and tax deductible.

Let us now jump ahead to 2007.  Now MI is tax deductible as long as your adjusted gross income is $100,000 or less.  Good timing since the residential real estate market was starting to sink.  It really started to get ugly, at an accelerating pace, in August 2007.  Second mortgages would no longer go to 100% financing.  Then it was 95%, and now it can be as low as 80% in California (I think it is 65% in some parts of Florida and Nevada).

Time to dust off the mortgage insurance charts!  But wait!  We have big changes happening in MI land that make financing a little harder.  So let me get to the bottom line….

So far I have heard of new guidelines from MGIC and RMIC.  I am sure PMI, GE and the others are developing their new guidelines as we speak.  Here are some of the basics for restricted markets (and that is all of California):

• LTV/CLTVs of 90.01% - 95% require a credit score of 680.
• LTV/CLTVs of 90.00% or less requires a minimum credit score of 620.
• The maximum LTV/CLTV for condominiums is 90%.
• LTV/CLTVs greater than 95% are not eligible.
• Investment property loans are not eligible.
• Cash out refinances are not eligible.
• Reduced documentation (Alt-A) loans are not eligible.
• Potential negative amortization, including Pay Option ARMs are not eligible
• Expanded Criteria (A-) are not eligible.
• Debt to income ratios will be maxed out at 45% for owner occupied homes, 41% for investment properties.
• Fully documented loans only.  No stated income or no documentation loans.

Remember, these guidelines are for restricted markets and loans above 80% LTV.  If you happen to be buying a property in Montana, you’re golden!  There are no restricted areas in Montana.

Ok, there will be the occasional exception to the rule.  There will be variations from one mortgage insurance company to another.  Compensating factors, like 6 – 12 months savings might make a difference.

So there you have it.  Seller carry-back seconds should become quite popular again.  This will not last forever, but it is what we have now.  Bottom line, if you are going to be in the market to buy a home or refinance your home you will need a mortgage professional who has experience to guide you through the minefield that has become California real estate financing.  And you know what?  Owning your home will be affordable and you will absolutely love it!

Kris Anderson

Allstate Mortgage Company

1260 N. Dutton Avenue, Ste 274

Santa Rosa, CA  95401

(707) 521-3434 ext 23

Email:  krisanderson@manos.us

Website:  www.krisanderson.net       

February 22, 2008