Many of New
Orleans’s would-be first time home buyers are stopped short when they come up
against the need to raise the initial deposit. But just because you don’t have a
hefty down payment, it needn’t mean you can’t own your own home. You can still
purchase a house with less than a 20% down payment if you are otherwise
qualified—that is, if you take advantage of something called private mortgage insurance (“PMI”).
The reason there
is a market for private mortgage insurance in New Orleans is because lenders face an increased risk when
they issue a loan with a low down payment. The simple fact is that the less
money a home buyer invests in a property, the greater the possibility that he
or she will choose to simply walk away. Someone with 5% equity in a home has a
lot less invested than had they plunked down 20%—so if anything goes wrong,
it’s proportionately easier for them to just hand the keys to the bank. Mortgage
insurance covers the lender in such a default.
The cost of
private mortgage insurance in New Orleans comes in the form of monthly premiums
in an amount set by the PMI issuer. The amount charged depends upon the loan-to-value
ratio of the property, factored in with the borrower’s credit score. The
insurer guarantees the difference between a 20% down payment and the amount put
down by the borrower. For instance, if the borrower puts a 15% deposit on a $200,000
home, but then defaults, the PMI provider would cover the lender for $10,000—the
difference between a standard 20% down payment (here that would have been $40,000)
and the amount actually made as a down payment ($30,000).
The obligation
to continue making PMI policy payments ends once the principal balance on the
mortgage falls below 78%, since the borrower’s stake in the property will have
risen to 22%—a touch above the 20% threshold. Borrowers can reach this
benchmark early by choosing pay extra on their home’s principal balance or by
making improvements that result in raising the value of the property: another
way to improve the LTV. That route requires a request for PMI cancellation and
borrower’s payment for an updated property appraisal (the appraiser will be
named by the insurer).
For prospective
buyers who are otherwise fully qualified — but for one reason or another can’t
supply a 20% down payment — private mortgage insurance makes homeownership
possible. No matter what your financial profile, starting the pre-qualification
process is your first step. Contact me to get the ball rolling this spring!
Terez Harris NOLA Real Estate Group
(504)297-2619
Harris.Terez@gmail.com
Keller Williams Realty New Orleans 8601 Leake Ave. New Orleans, LA 70118 504-862-0100
Each office independently owned and operated. All brokers licensed in the state of Louisiana.
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