The collapse of the mortgage industry and the resulting fallout from the crisis has impacted mortgage insurance companies. Before the crisis, the mortgage insurance companies would approve and issue policies to those individuals that met the qualifications of the lender. However, it is the insurance company responsibility to cover the loss incurred by the lender when the borrower defaults on the note.
As the crisis progressed and more and more homes went into foreclosure, the insurance funds were drained. As a result, the insurance companies decided that they would participate in the qualification process of the insured. Simply put, just because the borrower qualified for the note, it didn’t necessarily mean that the insurance company would take a risk and insure the buyer. A number of changes had to be made in order for insurance companies to protect their interests. Let’s take a look at some of the changes.
Credit scores have become more important since the crisis. In order to qualify for mortgage insurance, the prospective client must have a higher credit score. The insurer is looking for a credit score between 680 and 720. It does depend on the loan program that you are going to participate in whether or not all the criteria will apply to you. The insurer will be reviewing your credit history as well as your credit score.
Even though credit score is a reflection of your history, the insurer is interested in the specifics. The insurer is checking to see if you maintained a current payment history for housing. If you had late payments, how late were they? A late payment is not necessarily a disqualifying event. But if the payment were more than 60 days late in the past two years, then you may not meet the eligibility for insurance.
Any repossession on your credit will negatively impact your ability to get mortgage insurance under their new guidelines. If you filed bankruptcy or had another property that went to foreclosure, you will probably be denied the insurance or you will have to pay a high cost to insure the property.
You have options if you do not qualify for mortgage insurance and the lender requires it in order to approve your loan. You can try to qualify for a loan with a smaller down payment and use the extra cash to pay for the insurance up front. The Federal Housing Administration (FHA) will loan money with a 3.5% of the value of the home down.
This loan program is designed for the borrower with lower credit scores and a poor credit history, as well as those without the funds for a large down payment. If you can increase the down payment on the property you wish to purchase to at least 20% of the value of the home, then you will not be required to purchase the mortgage insurance.
If you qualify, you can apply for the 80/10/10 loan. This loan requires a 10% down payment, a loan for 10% of the value of the property, and a loan for 80% of the value of the property. The proceeds from the 10% loan go into the down payment and you have met the percent down requirement of the lender. Keep in mind that you will have two mortgage payments as a result.
Your employment and the amount of income your household brings in will also be a factor in your qualification for the mortgage insurance. The insurer is looking for length of employment and length of time on the job. If you are self-employed then you have to be able to produce from one to two years of both personal and business income tax returns showing sufficient income to qualify.
If you are employed in more than one job you may need to provide pay stubs showing that you will remain in the job. A past employment history of two years would be needed to qualify. The lender will ask you to verify your income by providing current pay stubs, income tax returns, copies of commission checks, and bonuses and other compensation proof of income. If you do not have these documents or do not have enough time on the job you may not qualify for the mortgage insurance.
One last thing that comes into play in determining qualification for mortgage insurance is reserves. Sometimes insurers require the lender to hold reserves. Reserves are money held in escrow by the lender that will have a predetermined amount of funds held. They usually request for two months of reserves. This money is in addition to the closing costs and the down payment amounts. You must have this money from a source other than financed in the mortgage loan.
As you can see, just because you qualify for a mortgage loan doesn’t mean that you will automatically be approved for mortgage insurance. Because mortgage insurance is required when not enough of an investment is made in the property, the disqualification from mortgage insurance may disqualify you from the mortgage approval by the lender.