What Is Private Mortgage Insurance & How Does A 4506-T Affect It?

private-mortgage-insurance

Lenders typically require private mortgage insurance if a buyer’s down payment for a home is less than 20 percent. This is to cover the risk of a potential loss. Fortunately, mortgage insurance is not required for the entire life of the loan.

What Is Private Mortgage Insurance?

If a borrower defaults on a loan, PMI reimburses the lender. Lending institutions typically use it to ensure payment during the early years of the loan. The borrower pays the premiums for the PMI policy.

PMI Fees

The two main factors affecting the fees for PMI are down payment size and credit score. Lenders base fees on percentages, which they determine by using these criteria. Borrowers typically pay between 0.3 percent and 1.5 percent of the loan’s value, and that amount is assessed on an annual basis. While some borrowers pay a large sum upfront toward their PMI, others make even monthly payments. Paying a larger sum upfront is a good idea for borrowers who want to cancel their PMI sooner.

PMI Tax Breaks

Your PMI may be deductible. Use Schedule A to calculate a deduction. If your loan was after 2007, the home is a primary residence and your AGI is less than 109,000, you may qualify for a deduction. Tax rules change from one year to the next, which means that PMI may not always be deductible. IRS Publication 936 contains new information about PMI deductions every year.

PMI Cancellation

When a loan balance reaches 78 percent of the home’s value at the time of purchase, the lender cancels the PMI policy. This takes several years in most cases. However, borrowers who pay more toward their principal than their monthly mortgage payment can end their PMI sooner. Although lenders automatically cancel PMI when the balance reaches 78 percent, borrowers can contact lenders to request cancellation when the balance reaches 80 percent.

In some cases, lenders consider the value of a new appraisal in PMI cancellation cases. Borrowers can pay $500 or less for a new appraisal if the home’s value has increased. This may help a borrower reach the 80 percent mark sooner. Another option to increase the home’s value is remodeling. However, it is important to keep remodeling projects affordable and practical enough to make sense financially.

How Does Form 4506-T Relate To Private Mortgage Insurance?

Lenders use IRS Form 4506-T to verify a borrower’s income. Borrowers give the lender permission to access tax information with this form. The main problem with this step is how much time it normally takes. The IRS is often slow to process 4506-T requests, which may delay the loan process. Some lenders wait until after loan approval to request tax records, and this results in even lengthier delays.

When applying for a loan, ask the lender to request the tax documents as early as possible in the loan process. This will help borrowers avoid a longer delay in closing and any possible personal expenses related to a delay.

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