When your client is looking to buy a primary residence with conventional financing, PMI is a tool that your buyer can use to be able to purchase a home with less than 20% down. It will impact the total monthly payment your client will need to qualify for so it is important to estimate this in calculating total monthly housing payment if your buyer is bringing in less than 20% down. In the case of first time home buyers, the down payment can be as little as 3% and as little as 5% with experienced home owners.
The PMI monthly premium is based on several factors, such as amount of down payment, credit score, and loan type. Use the following factors as a general guide when estimating PMI for your buyer understanding that their mortgage lender will be able to provide them with a more specific quote for PMI. The percentages below reflect the cost of the PMI as a percentage of the loan amount annually. Just divide by 12 to get monthly amount:
- 3% Down = 0.75%
- 5% Down = 0.6%
- 10% Down = 0.4%
- 15% Down = 0.2%
Calculating the PMI into the monthly amount is as simple as multiplying $100k X 0.75%, 0.6%, 0.4% or 0.2% depending on the down payment and dividing by 12 per the chart below:
Keep in mind that all of the annual numbers above have been rounded up or down slightly to get an even dollar amount for calculation purposes.
Based on the down payment your client has, you can easily determine the amount to add to the $500 per month per $100,000 in loan amount figure based on the down payment. For example, if your buyer has 5% down payment instead of the 20% down payment we talked about at the beginning of this article, then the calculations are reworked as follows:
Again, based on current mortgage rates in the low to mid 4% range, we can estimate that the principal and interest (P&I) payment will be approx $500 per month for every $100,000 in loan amount. But now we must add in $50 per month to take into account the monthly PMI payment, so our monthly total is now $550 per $100,000 in loan amount.
Then we just need to subtract the monthly estimated property tax and insurance from their maximum housing payment to determine the amount remaining for P&I and PMI. We can use the same $250 amount for property tax and $150 for homeowners insurance and it is calculated as follows:
$2600 Max Total Housing Payment – $250 Property Tax – $150 Homeowners Insurance = $2200 remaining per month for P&I and PMI.
We now divide the remaining P&I of $2200 by the $550 per month per $100,000 in loan amount and are left with 4. This 4 number translates into $400,000 in maximum loan amount at current interest rates so that the P&I + PMI on a 30 year fixed loan does not exceed $2200 per month. Here is the calculations for that:
$2200 / $550 = 4 which translates to $400,000 Max Total Loan Amount
Finally, to determine the maximum purchase price based on a $400,000 maximum loan amount with 5% down payment, we divide the $400,000 loan amount by the loan to value (LTV) which is 95% with a 5% down payment and calculate as follows:
$400,000 / 95% = $421,000 Max Total Purchase Price
Now you can help them calculate their maximum purchase price if they do not have a full 20% to put down and avoid the PMI.
If we apply the PMI to our first Conventional scenario above where the buyer has 10% down instead of 25% down, it will look like this:
Practical Exercise – Calculate approx. maximum monthly housing payment for a FHA loan based on the following:
- Husband is full time salaried and earns $6500/mo before taxes with spouse and 2 children.
- They have an auto lease of $400
- They have approx. minimum credit card payments of $450/mo
USDA (Rural Housing Development) loans can be calculated as follows using the same home buyers:
- Husband is full time salaried and earns $6500/mo before taxes with spouse and 2 children.
- They have an auto lease of $400
- They have approx. minimum credit card payments of $450/mo
Ultimately, everything is dependent upon the needs and desires of your buyer and their current financial position. This short cheat sheet guide is just a reference for you to use to help your buyers determine their approx. purchase price range and monthly payment amount as you initially build your relationship with them. Any good lender will explain all of the above to your buyer during the pre-approval process however, there are times when your prospective client doesn’t meet with a lender within the first few weeks or months of developing a relationship with them. These calculations are a way for you to demonstrate to the buyer your versatility and knowledge in all facets of the purchase process and can be their trusted source of a wide range of real estate expertise until they take that next step to get pre-approved by your favorite lender.
Below are some additional resources to learn even more about the mortgage loan process that your client must traverse today.
- Freddie Mac Step-by-Step Mortgage Guide from Application to Closing: http://www.freddiemac.com/singlefamily/docs/Step_by_Step_Mortgage_Guide_English.pdf
- Consumer Financial Protection Bureau Consumer Home Loan Toolkit: https://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf
- Definition of an ARM Loan: https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan-en-100/
- Discount Points and Lender Credits and How They Work: https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136/
- USDA Property Eligibility Tool: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp
- FHA Condo Lookup: https://entp.hud.gov/idapp/html/condlook.cfm
Recent Comments