Private mortgage insurance (PMI) will be required in most cases if you put down less than 20% of the purchase price when you buy a house. You will have to pay monthly premiums, but the insurance won’t protect you; it will protect your lender if you default on your mortgage payments. You will have to pay for private mortgage insurance every month until you reach 20% equity. Your credit score and other factors can influence how much you’ll have to pay for PMI.
A Good Credit Score Can Help You Keep Your PMI Payments Down
Private mortgage insurance premiums are based on a percentage of the original loan amount. That percentage varies from lender to lender and from borrower to borrower.
Since private mortgage insurance is designed to protect the lender, a borrower’s credit score is taken into consideration when setting premiums. A borrower with a lower credit score is considered riskier, therefore that individual will be charged higher premiums for PMI.
Borrowers with higher credit scores are charged premiums that are a lower percentage of their loan value. A borrower with a “fair” credit score may have to pay more than twice the amount that a borrower with a “very good” credit score will pay for PMI, everything else being equal.
Other Factors Can Affect Your PMI Rates
Insurance companies will also base your premiums on the total loan amount, the percentage of the loan amount the policy covers, your debt-to-income ratio, the number of years in your mortgage term, whether the mortgage is for a primary or secondary residence and your loan-to-value ratio (the percentage of the purchase price that you borrowed). The greater your loan-to-value ratio, the higher your PMI premiums will be.
Boost Your Credit Score Before You Buy a House
If you can’t afford to put down 20% to buy a home, you will most likely have to purchase private mortgage insurance. You may not be able to avoid that expense altogether, but you can keep the amount you’ll have to pay to a minimum by building up your credit score before you start shopping for a house.
Focus on making all your payments on time, if you don’t already. If you have outstanding credit card balances, work on paying them down. You may want to consider a credit card that will let you transfer balances and lower your interest rate. Request copies of your credit reports and address any errors that you find.
If your credit is iffy right now, it may be a good idea to hold off on buying a house to give yourself time to improve your score. That may help you save a substantial amount of money in the long run.
