Picture this familiar scenario: Your buyer has been searching for a home since the beginning of the year. They’ve put in multiple offers, all lost to bidding wars and competing cash offers. Since they began house hunting, home prices have increased steadily and interest rates have nearly doubled, increasing the average cost of a home by more than 50%1. Now, they are faced with two choices: reconsidering their budget or waiting until they can save a larger downpayment.
It’s a difficult situation that many homebuyers are currently experiencing. However, there is an option that may be the key to helping more buyers afford a home in this environment.
Mortgage insurance (MI) is one of the most widely misunderstood components of home financing. It is often explained as a requirement that costs extra for homebuyers who don’t have a 20% downpayment2. Technically, that is true, but that might be the wrong way to think about MI — especially now when increasing home prices and interest rates are making it more and more difficult for many buyers to afford a home.
MI works by lowering the traditional 20% downpayment barrier, which has become increasingly difficult for buyers to save up. With the median price of a home in the United States now above $325,000, that means buyers need to have more than $65,000 saved for a 20% downpayment. With private MI, a buyer may be able to put as little as 3% down, which lowers the necessary downpayment savings to around $10,000.
Just like any insurance policy, there is a premium cost for MI which is typically paid by the homebuyer. But don’t let your buyers get hung up on the cost of MI — it is often one of the smallest components of homeownership costs, accounting for only 1% to 3% of the total cost of owning a home3. It’s also important to note that most MI products are temporary. Once the homeowner makes a certain number of payments or the property appreciates to a certain loan-to-value (LTV) ratio and meets loan seasoning requirements, MI may be eligible for cancelation. When home prices go up rapidly, as they have in recent years, the payment can drop away even faster.
Here are a few of the ways MI can help your buyer clients in different situations:
- Afford a home sooner. With private MI, your buyer may be able to purchase a home with only 3% down rather than waiting to save a 20% downpayment.
- Increase their budget. MI may help increase your buyer’s purchasing power by letting them afford a more expensive home with a lower downpayment.
- Cover an appraisal gap. In certain cases, MI may be used to shift the LTV ratio and restructure the loan so your buyer can cover an appraisal gap and still have enough cash to meet minimum downpayment requirements.
- Preserve their savings. Even for buyers who could afford a 20% downpayment, they may want to make a lower downpayment and keep some of their savings for unexpected home repairs, moving expenses, or furniture.
Thinking of MI as a benefit to your buyers requires a change of perspective for many agents who are used to viewing it as something to be avoided. But as a trusted advisor in a tumultuous market, you can provide critical information so your buyers understand all their options. MI helps millions of buyers achieve their dreams of homeownership each year, and it may be able to help your clients too.
Visit radian.com to learn more about private MI and educational resources for homebuyers.
Radian is ensuring the American dream of homeownership responsibly and sustainably through products and services that include industry-leading mortgage insurance and a comprehensive suite of mortgage, risk, title, valuation, asset management, and other real estate services. We are powered by technology, informed by data, and driven to deliver new and better ways to transact and manage risk. Visit radian.com to learn more about how Radian is shaping the future of mortgage and real estate services.
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