Is the requirement for pmi based on the loan amount or the appraisal? I have read that some states have different rules. If If the appraisal is higher than the purchase price, does the down payment (to avoid pmi) need to be 20% of the appraised value or the purchase price. This is a new purchase, not a refi.
When we were young and were buying our first house with less than 20% down, it was based on LTV. Kiddos bought their first home less than 2 years ago. Ditto - LTV. Funny thing is that “V” always comes out to match the purchase price. Why would it be NJ specific? I would think it would be lender-specific, based on the lender’s tolerance for risk.
I have read that some states require it to be the lower of the appraised value or the purchase price. I have no idea why the states would be in on the decision, except that regulators like to regulate. We just discovered that there are hardwood floors in the upstairs (which is carpeted). Not sure if listing agent or seller knew that. Might bring value up on appraisal?
Where I am, I thought we had to have more than 20% downpayment to avoid PMI. actually it was 20% of the value of the house. So we bought a house for $100,000 but only had $10,000 to put down. House appraised for that amount…give or take a few dollars. Our equity was less than 20% so PMI was added.
Around here…most houses appraise for very close to the purchase price. Not usually a huge percentage more.
We were able to drop the PMI once we could demonstrate that we had more than 20% equity in the house.
Those hardwood floors are not going to raise the appraisal a huge amount.
“Might bring value up on appraisal?”
No. The appraisal is done by the bank, and the main goal for the appraiser is to make sure that the house indeed is worth the purchase price Therefore, rarely a house would appraise for more than the purchase price ( = V in the formula).
“I have read that some states require it to be the lower of the appraised value or the purchase price. I have no idea why the states would be in on the decision, except that regulators like to regulate.”
Can you please provide a link?
Fannie Mae and Freddie Mac guidelines are national, not by state. Same with private mortgage insurance. PMI is required if you make a down payment of less than 20%, and it is based on the lesser of the sales price or appraised value.
Example - you are buying a house for $100,000. Assume it appraises for $100,000 or higher. If your down payment is $20,000 or more - you do not need PMI. If your down payment is less than $20,000 - PMI will be required. The fact that the appraisal came in above the sales price is great, but it does not change the calculation - the 20% down is based on the sales price.
If the appraised value comes in lower than the contract price - all calculations are based off of the lower value - and the buyer has to make up the difference between the sales price and the value out of pocket. In reality, a low appraisal will typically result in the price being renegotiated or the deal falling through.
Not to complicate things too much, but a popular option to PMI is to do a 80/10/10 structure. Do an 80% first mortgage to avoid PMI and do a 10% second mortgage. As the value of the home increases - you can later refi into one loan - or just continue to pay both - and deduct the mortgage interest on your taxes.
rockvillemom,
Great idea, but too complicated for our purposes. We are co-signing for our son because he is a job that is salary plus commission but has been there for less than 2 years. He is earning plenty enough to make the payments and has a credit score around 720. I was hoping he could hold on to more cash to do upgrades to the property if he didn’t have to put as much down (if it appraised high enough to avoid pmi). The difference in the down payment wouldn’t change his payment much, but would keep more of his savings available
It is a short sale and the realtor thinks it is worth more than he is paying. I think she is right, its a good deal, but not such a good deal that the investors would jump all over it because it is quite liveable with a kitchen less than 8 years old and 2 good working bathrooms. The downstairs flooring is “pergo”, wood, and tile. There is NO wallpaper and no blue or green bathtubs!
@Bunsen, I re-googled for the answer to my appraisal vs purchase price and I think I may have been reading about refinancing, where the appraised value matters. He could take pmi for now and refinance when he’s been at his company for 2 years (june '16) but the risk is that rates go up or he has switched jobs again, or even that home values drop, and he’d have to pay title insurance again which would eat up the pmi savings. I guess he’ll continue with his 20% down plan. I hope this takes a while so he can continue to save. Dad won’t make him start paying rent since he has a contract to buy a place!
I love getting advice and answers here. There are often good tips and clarifications of things that I knew, but didn’t think through straight. Usually because I rush and overthink. I am a chronic over-thinker. maybe this, what if that???