Can I Avoid Mortgage Insurance if 20% Equity at Outset - On a Bargain Sale Property?

Question

My landlord has offered to sell me the property I've rented for the past 9 years. The price is $400K and it is worth $700K with a fix and lower $500's as-is and is quite livable. I'm also in the real-estate business.

I'd like to make the puchase and avoid mortgage insurance or MIP if an FHA. If I have 20% equity on appraisal on day one - can I avoid the mortgage insurance?

The appraiser will of course demand the purchase contract but I'd like to believe he can still go above the purchase price if value is present, even if an FHA appraiser.

Caroline Gerardo · Answer

If you have 20% equity and put 3.5% down  @Matthew Crivelli answer is incorrect ~ he will have mortgage insurance on FHA/or conventional. He has to apply and qualify to drop it on conventional. The servicer of the note processes the application to remove PMI.

The other suggestion to do two loans- (there is a waiting period as well)  maybe pay $4000+ for each is probably not worth the reduction of PMI. It only will make sense if rates drop, but I have no crystal ball to say rates will be better soon.

Sales price dominates so answer with FHA is no never. If you put 3.5% cash as down payment and the property is worth millions it does not matter. The mortgage insurance of 1.75% is stuck on a FHA loan forever until you pay it off in full by sale or refinance.

There are conventional low down payment loans. The answer for removing that mortgage insurance is it depends...

Fannie rule here for automatic when the LTV of original hits  https://servicing-guide.fannie...

Fannie rule here for requesting removal based on substantive improvements https://singlefamily.fanniemae...

You pay for appraisal, maybe start with your own BPO they inspect. Payments made on time, loan to value 79.99 for single family.

There have to be comparable sales- closed sales with a loan in past 3 months similar square footage.

Freddie is a tiny bit more relaxed here's a long explanation https://myhome.freddiemac.com/...

Before you apply for the loan you need to know if the lender is a Fannie or a Freddie shop only or if they sell to both.

Appraiser yes will look at comps, not any after repair or rehab value. It doesn't matter if valuation is higher than sales price, the lender will see the sales price in the contract/escrow/title/down payment/ assets etc and you cannot hide this.  If there are health or safety code violations you might be better looking into FHA 203k or the several conventional rehab loans that can give you $20000 or more to fix it to code.

A hard money lender will look at the appraised value and if the LTV is low enough they can do this short term like a year or two to rehab and then you either have a refinance ready approved or sell. Hard money doesn't add mortgage insurance. A private lender might also suit your plan. Problem is hard money is going to be more expensive.

Burt L. · Answer

@Eric Miller

I certainly appreciate the suggestion about a new conventional program, without PMI. On a purchase price of $400K and 3% down (or 3.5% FHA) it appears I wouldn't meed the "Under 350K loan threshold".

The fact that ihat the purchase price is $120K or so under FMV doesn't seem to matter in any scenario, as described in the earlier posts by others. Thank you.

Eric Miller · Answer

Depending on the loan size you can look for a broker who is offering the new Conventional financing program without PMI. You have to be under 80% area median income and loan amount needs to be under $350,000. It's a really great option for those looking to put less money down but also remove PMI. It sounds like your scenario should be fine though.

Dave Skow · Answer

@burt

@Burt L.- thanks - if you will be  getting a loan - all lenders  will  use the lesser of  the price you pay and the appraised  value   2)  avoid  using a  FHA loan  because the  MIP is permanent on this  type of loan and the only way to eliminate it is to  refinance the loan   3)  use a conventonal loan / you will likely need to pay mortgage  insurance  intially  likely for   1-2  yrs   4)  once you have the loan - ask the lender  for details on when and the process  so you can  request the mtg ins to be  removed

Jay Hurst · Answer

You would not be exposed to rising rates on how we do it because the refi happens right away.  You can even lock in a refi rate before closing on the purchase. You would saving 100k+ in cash.

Burt L. · Answer

I certainly appreciate the replies - it has more moving parts than I'd thought as it seems that the property will be valued at the lessor of FMV or contract price.

Would I be able to have it appraised at current FMV (without rehab) if the owner landlord did an owner carry/sub-2 and title was already transferred to myself?

I suppose it would have to remain for six months in this situation for either conventional or FHA?

I'm leery to be in this situation again as an income property I finished rehabbing a year ago left me exposed to sharp rate increases and could only watch rates escalate higher. I would also be in this situation even with a short-term owner carry/sub-2.

The goal of course is a small downpayment without mortgage insurance due to the baked-in equity that apprently can't be recognized in utilizing a single loan. I could also be set up for six months of rate increases doing two loans, as before.

Jay Hurst · Answer

@Burt L.

What we do in this case is give you a bridge loan to buy the property using the as-is value NOT the lower of the contract/appraised value that most loans programs are going to require. Then we refi right away using the value for a long-term loan.  The benefit is more about the cash you can save for the down payment then not having mortgage insurance.

We would get an appraisal and if it came in at 530k (as is) with a 400k contract price we would loan you the entire 400k with no money down. Then immediately refi into a conventional loan 30 year fixed using the same appraisal at 75% loan to value. No MI, and NO cash into the deal.

Eric Veronica · Answer

For conventional loans or FHA loans the lender will typically  use the lesser of the sales price or the appraised value when determining value.  This means that you will still have PMI unless you put 20% down.  If you were purchasing from family you could structure the loan with gift of equity to count as your down payment and avoid PMI but it doesnt sound like that is the case here.

The other way you could be creative and avoid PMI in the long term is through a two loan process. You could buy the home with a loan down payment and your original loan will have PMI. Then you could refinance the loan a few months later. When you refinance the lender would then use the current value when determining your loan to value %.   If you are under 80% your loan will not have PMI.

So the first loan that you keep for roughly 6 months would have PMI but the second loan that you would keep long term would not have PMI.  The obvious drawback to this approach is that you would pay two sets of closing costs.  The way to get around this would be taking a slightly higher rate when you are purchasing the home.  This higher rate would offer you a credit from the lender which you could use to offset closing costs.  Saving thousands in closing costs is likely worth the higher interest rate you would experience during the first 6 months of the loan.

Matthew Crivelli · Answer

@Burt L.

Typically if you have 20%+ equity, you will avoid PMI. The 20% doesn't have to come out of your pocket, if you have the equity you should be able to avoid the insurance costs. Please note the appraiser is not going to count projected repairs when he gives you an is as value.

Can I Avoid Mortgage Insurance if 20% Equity at Outset - On a Bargain Sale Property?

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