USDA Mortgage Insurance Archives

Can You Use PMI as a Tax Deduction?

June 28, 2018 By JMcHood

One of the largest advantages of owning a home is the deductions you can take on your tax returns. Oftentimes, homeowners can deduct thousands of dollars on their taxes. Understanding what is tax deductible and what isn’t can help you make the most of your situation. One thing many people overlook is the fact that PMI is a tax deduction.

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When Do You Pay PMI?

Any borrower pays PMI on loan amounts, which exceed 80% of the home’s value. If you took out only one loan for 95%, for example, you pay PMI. If, however, you took out two loans, a first for 80% and a second for 15%, you do not pay PMI. It is only on a first mortgage higher than 80% of the value of the home.

PMI is Like an Interest Tax Deduction

This year, you can deduct PMI as you would an interest tax deduction. In fact, you deduct the premiums as if they were interest. This helps to lessen your tax liability. It is not a direct credit, however. It is a deduction. This means the amount you can deduct comes directly off your income, reducing your adjusted gross income. This is the number the IRS uses to figure your tax liability.

The Maximum Income Allowed

There are certain restrictions when it comes to deducting PMI on your taxes, though. For instance, borrowers with an adjusted gross income higher than $100,000, cannot deduct the full amount of the PMI they paid. If your adjusted gross income is higher than $109,000, you cannot deduct PMI at all. The deduction is meant for the middle-of-the-road income earners.

If you make more than $100,000, whether you are single or married, the amount you can deduct decreases by 10% for every one thousand dollars. For example, if your adjusted gross income equals $105,000, you can only deduct 50% of the PMI you paid for the year.

Itemized Deductions

In order to take advantage of the PMI deduction, you must itemize your deductions on your taxes. This is the same as it is for the interest deduction. In fact, you deduct PMI in the same place on Schedule A. In the section where you deduct the interest, you will find a section titled “PMI Deduction.” This is where you enter the amount and your deduction is calculated.

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The Last Year

The PMI deduction began in 2007. This was when homeowners could deduct the premiums they paid. It was originally a part of the Tax Relief and Health Care Act of 2006. It was not meant to be a long-term deduction, but since the industry is still recovering, the deduction still exists. As of right now, though, 2016 will be the last year you can take advantage of it. If it is to continue, Congress must approve it.

The Additional Requirements

There are some additional requirements you must meet in order to take the tax deduction for PMI. The most important requirement is the date you took out the loan. The deduction is not applicable on any loans prior to January 1, 2007. In addition, if you refinanced during that time, the PMI you can deduct is only the loan amount for the initial outstanding principal. If you took any cash out of the equity of your home, you cannot deduct the PMI on that money.

If you have a second home, you may be able to deduct the PMI you pay on that home as well. This is true as long as you use the home for your own use. It could be a second home or a vacation home. If it is an investment home, however, it is not eligible for the deduction.

Canceling PMI

While it might be disappointing that the PMI tax deduction may go away after this year, remember you can cancel PMI. As soon as your loan is less than 80% of the value of the home, you no longer have to pay this insurance premium. It is up to you to determine when this happens, though. The lender is not required to automatically cancel your PMI until the LTV hits 78%. This could leave you paying unnecessary insurance premiums for a while.

There are several ways for you to cancel your PMI. You can pay for a new appraisal if you think the value of your house increase recently. This helps you to cancel PMI faster. While you won’t have the tax deduction any longer, you will save a lot more by not paying the premium any longer. If you want to take care of it faster, you can also refinance your loan. As long as you use a rate/term refinance, rather than taking cash out of the equity of your home, you may be able to cancel PMI faster.

Paying PMI might seem like a pain, but it has its advantages. First and foremost, it makes it possible for you to purchase a home. Without PMI, you might not be eligible for such a high LTV. Secondly, it gives you a break on your tax liability. In today’s day and age, tax deductions are hard to come by, making the PMI deduction worth quite a bit. Even if you only save a few hundred dollars on your taxes, every penny helps when you are trying to save money!

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Can you Include the USDA Upfront PMI Fee in the Loan Amount?

August 1, 2017 By JMcHood

The USDA loan is unique because it provides you with 100% funding. You don’t need any money down on the home. It may sound too good to be true, but it gets better. You can also roll the upfront PMI fee into the loan on top of the 100% LTV. In reality, you could owe 101% of the home’s value when you first buy the home.

What is the USDA Upfront PMI Fee?

The USDA Upfront PMI is a guarantee fee. In short, it helps fund the USDA. They are a self-funded program. They also guarantee every loan they approve. If a USDA borrower defaults on their loan, the USDA pays the bank back. The bank might not get 100% of the amount they lost back, but they’ll get a high percentage of it. This is why lenders don’t mind writing risky loans. The USDA guidelines are rather loose when it comes to guidelines. Some lenders do add their own requirements on top of the USDA’s requirements, though.

Right now, the USDA upfront fee equals 1% of the loan amount. On a $100,000 loan, you’d owe $1,000. It’s significantly lower than other programs, like the FHA loan. Right now, FHA loans charge 1.75%. This means $1,750 at the onset of the loan.

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If you decide to roll the upfront fee into your loan, remember that you’ll pay interest on those fees. You stretch the payment out for 30 years. This means a lot of interest on that $1,000. But, if you don’t have the cash up front, it can be your only choice.

What is the Annual Fee?

The USDA also charges an annual fee. It’s more like a monthly fee, though. The insurance company charges the lender on an annual basis. They base your fee on the average outstanding balance for the year. The lender pays the fee at the time of billing. The lender then charges you 1/12^th of that amount every month. You can expect the annual mortgage insurance fee to decrease slightly each year as long as you make your monthly payments on time.

Right now, the USDA charges 0.35% of your average mortgage balance. Initially, on a $100,000 loan, you’d pay $350 per year or $29 per month. Again, the lender adds it to your mortgage payment. You don’t pay the full amount up front.

Paying Other USDA Closing Costs

The USDA loan involves other closing costs as well. You can expect between $5,000 and $10,000 on average. What if you don’t have the money? You have options:

Ask for gift funds from family members – Family and non-family members may be able to provide you with the funds to close. They must provide a Gift Letter letting the lender know it’s a gift. The lender needs to know beyond a reasonable doubt that you are not taking on another loan. This would affect your debt ratio and possibly your loan approval.
Roll the costs into the loan – If you have room between the sales price and the appraised value, you can include the closing costs in your loan. The only amount you can go over 100% of the appraised value is the funding fee. Everything else must fall below the appraised value. If there’s room, though, you can take advantage of it.
Negotiate a higher price with the seller – Again, if the value is there, you can work with the seller. Offer a higher contracted sales price in exchange for a seller credit. At the closing, the seller then pays your closing costs. The seller still walks away with the same sales price in the end.
Negotiate a no closing cost loan – Your lender may offer a no closing cost loan as well. This usually means you must take a higher interest rate. If you qualify for the higher rate, you won’t have to bring any money to the closing. The lender covers the closing costs for you.

The USDA loan is one of the few loans that provides so many options when it comes to closing costs. The USDA upfront PMI has the most lenient rules. Being able to automatically include it in your loan amount is very rare. This lowers the amount of cash you need at the closing. It can affect your debt ratio, though. If you are already close without rolling the funding fee into the loan, you may need to work with your other options. Make sure you talk with several lenders to explore all of your options. This way you can find a way to make the USDA loan work for you.

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Is Mortgage Insurance Required With a USDA Loan?

April 5, 2017 By JMcHood

Mortgage insurance has a bad reputation. Who wants to pay more on their mortgage payment than they already do? Probably not many people do. But, in some cases, this insurance helps. It is not a way to punish you. It is a way to help you secure financing. In the case of the USDA loan, it helps fund the United States Department of Agriculture. This way they can provide you with the opportunity to have a USDA loan. Here we look at the different types of insurance and what you may owe.

Funding Fee for the USDA Loan

There are two types of fees for the USDA loan. The first one you will come across is the funding fee. The idea is to pay this fee at the closing. Right now, it equals 1% of the loan amount. On a $150,000 loan, you would owe $1,500. But, if you can’t pay the fee upfront, you can roll it into your loan amount. It doesn’t affect your LTV either. Since USDA loans don’t require a down payment, you will be over 100% of the value of the home.

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Annual Mortgage Insurance on the USDA Loan

The second type of fee is the annual mortgage insurance. This is a monthly fee. But, it is calculated for the year. The USDA bases the amount on your average outstanding principal balance for the year. Right now, you pay 0.35% of this amount.

For example, on the $150,000 loan, you would owe $525 for the year or $43.75 per month. Your loan servicer pays the annual bill for you. To make the payments more affordable, they divide the annual fee up over the 12 months. This is how you pay $43.75 per month on a $150,000 loan. The amount you pay decreases as your principal balance decreases. Each year you will pay less. Even though you pay it for the life of the loan, the amount becomes negligible near the end of the term.

What the Premiums Pay For

The USDA insurance fees help the USDA continue to provide loans for rural homeowners. The USDA guarantees the loans they approve. This means they back the lender up in the face of default. If you were to stop paying your USDA loan, the bank would foreclose on you. This means you lose your home. It also means the lender loses a lot of money. They may recoup some of it when they sell the home, but not all of it. Rather than letting the lender suffer, the USDA pays back a portion of what the lender lost. This way lenders can have more lenient guidelines and help rural areas flourish. The money collected from the funding fee and annual insurance helps the USDA guarantee the loans.

Qualifying for a USDA Loan

Not everyone will qualify for a USDA loan. The USDA created the program to help low and very low-income families afford a home. It is only for homes in rural areas. This brings up two conditions you must satisfy. Without satisfying these conditions, you wouldn’t be eligible for the program. This is different than qualify for the program. First, we look at the eligibility requirements.

Income Eligibility

The USDA loan is unique because the more money you make, the less likely you are to be eligible for the program. The USDA looks at household income. This differs from most loan programs as well. Usually, they just look at the borrower and co-borrower’s income. If your household income exceeds the limits for the area and your family size, you don’t qualify. You can find out the limits for your area, by visiting the USDA’s income limits page.

In addition, you must buy a rural property. Determining the rural boundaries is difficult without the USDA’s map, though. They consider rural areas those with a low population as long as they are outside of the city lines. The USDA’s website can help you determine which areas are rural as well.

Qualifying for the USDA Loan

Once you know you are eligible for the program, you can then determine if you qualify. This is the same process you would go through for any other loan. You need a high enough credit score and low enough debt ratio. The property also needs to pass the appraisal and have a high enough value. Following are the simple USDA guidelines:

The USDA has liberal credit score requirements. But, the higher your score, the less evaluation underwriters must do. Scores over 640 are considered “high” for USDA purposes. Anything below that score and you may have to supply compensating factors.
Debt ratios for USDA loans are 29/41. If you need more than 29% of your gross monthly income to cover your mortgage payment, you may need compensating factors. The same is true if you need more than 41% of your gross monthly income to cover your monthly debts.

The USDA considers compensating factors to be things like a high credit score, assets on hand, or a lower LTV. This means you put money down on the home. This isn’t required, but it can help your chances for approval.

If you have a bankruptcy or foreclosure, it must have been discharged for at least 3 years. You must also not have any new collections over the last 12 months. During that time, you may also only have one 30-day late payment.

The Benefits of the USDA Loan

USDA loans allow you to borrow 100% of the value of a home. You also have the benefit of low interest rates and closing fees. The USDA guidelines are also pretty flexible. Borrowers with low income often have an easy time securing a USDA loan. You must show financial responsibility. As a reward, you may be eligible for the Direct or Guaranteed USDA program. The Direct program may provide subsidies to help make homeownership affordable. This program is for very low income families. All others may be eligible for the Guaranteed Program.

The largest stipulation is you can’t be eligible for any other loan program. You also can’t own any other suitable housing. The USDA program is meant to help those who can’t find suitable housing because of financial constraints.

The USDA started the program to help families as well as areas. Rural areas often struggle financially because of the lack of stimulation. With the help of flexible financing, more families can own a home. This helps rural areas flourish and helps families find suitable housing. Even though you pay mortgage insurance, it is often lower than any other program.

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How does the Mortgage Insurance on USDA Loans Compare with FHA Loans

July 11, 2016 By Justin McHood

USDA loans and FHA loans have a few things in common – they are both backed by a government agency and they both have lenient guidelines when it comes to qualifying for them. Where they differ, however, is in the amount of mortgage insurance you have to pay for in order to have the loan. Both loans require an upfront fee which you can pay at the closing or wrap into your loan amount as well as annual mortgage insurance, which you pay monthly in your regular payments, but the amounts differ.

FHA Mortgage Insurance

FHA loans are backed by the FHA. They have flexible qualifying guidelines and do not require very high credit scores. Because of that, the agency requires upfront mortgage insurance to fund the reserve account that they hold in order to make good on the claims that lenders have to make in order to get paid on the loans that their borrowers default on. The reserves are funded with the 1.75% of the loan amount that each borrower pays. On a $200,000 loan, you would pay $3,500 at the closing or wrap it into your loan amount if you are eligible to do so.

The FHA also charges annual mortgage insurance to further the reserve funds of their account. This money, however, gets paid monthly and is equal to 0.85% of the outstanding loan amount. On the $200,000 loan, this amount would equal $141.67 per month, but would change each year as the amount of the outstanding principal decreases.

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USDA Mortgage Insurance

USDA loans are backed by the USDA and have similarly flexible guidelines. These loans were created for low and very low income families in an effort to help them become homeowners. This program also requires upfront and annual mortgage insurance. The upfront mortgage insurance funds the USDA’s reserve account, much the same as the FHA’s upfront mortgage insurance does. The amount you pay on a USDA loan is 2.75% of the original loan amount. Typically, most borrowers roll this cost into their loan, which the USDA automatically does for you in an effort to make the loan more affordable. On a $150,000 loan, the amount that would be required upfront equals $2,625.

The USDA charges mortgage insurance on an annual basis as well. This money helps to fund the reserve account and is equal to 0.5% of the outstanding loan amount. In the start of a $150,000 loan, the amount would equal $62.50 per month, but would change yearly as the amount of the outstanding principal decreased.

What’s the Difference?

Let’s take a look at a $125,000 loan for both the USDA and the FHA loans to see which would cost you less in the end:

FHA Loan – The mortgage insurance on this loan would equal $2,187.50 (the upfront mortgage insurance) plus $88.54 per month for annual mortgage insurance. For the first year, the total amount you would pay would be $3,249.50.
USDA Loan – The mortgage insurance on this loan would equal $3,437.50 (upfront mortgage insurance) plus $52.08 per month for annual mortgage insurance. For the first year, the total amount you would pay would be $$4,062.50.

The loan you qualify for should dictate which program you use. As you can see, the FHA loan is the more affordable option as far as mortgage insurance; however, not everyone will qualify for this program. If you are a low or very low income family, qualifying even for an FHA loan might prove to be a hardship, which is why the USDA loan is a great option for these families. If you purchase a home in a rural area, you are eligible for this program. Shop around with various lenders to see how much you can get your closing costs down and then enjoy the benefits of either of these government-backed loans.

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