Buying a home was the most confusing process I've ever gone through. This is coming through the girl who had to take Oceanography four times…believe me, I've dealt with my fair share of confusion. The brokers kept throwing out terms like “mortgage insurance,” “equity” and “principal.” We talked with people including home inspectors, real estate agents, lawyers, accountants, bankers, loan processors and underwriters. And since a good neighborhood was SO important to us, we met with the previous owners and scoped out the neighbors a couple of times, too.
Have I mentioned that I was eight months pregnant when all of this was going on?
Our biggest home-buying issue was that our careers were very new. Nate was a relatively recent hire with his company. He had racked up huge educational and business start-up costs in the previous two years, and the banks saw him as a risky investment. I was a young mom who had quit her snazzy marketing career to pursue blogging full-time. On paper, we didn't have the most impressive resumes.
We'd invested a ton of “sweat equity” (and a lot of money) into our individual skill-sets. Our hard work had paid off and we suddenly found ourselves with the monthly income to afford a home, and we wanted it as soon as possible. The market in our area had hit rock bottom and begun a steady incline, and the interest rates were as low as they'd ever be. We knew it was time to get into our home, but we were having a heck of a time convincing the mortgage brokers that we were worth the gamble.
Enter FHA Mortgage Insurance
In reading all the paperwork after-the-fact, I now understand that there were two make-or-break factors in us getting our home: the down payment and the mortgage insurance. We were lucky to have a large chunk of money for the down payment, but lenders saw our short employment history and didn't want to risk that we'd stop making our monthly payments. That's where mortgage insurance comes in. Our credit scores qualified us only for an FHA (government-backed) loan, which requires mortgage insurance to protect the lender.
That's right: mortgage insurance does NOT protect the buyer. At all. This took me a long time to grasp. Why am I paying for something that doesn't help me? Mortgage insurance pays the lender if we stop making our house payments, but it does not help us keep our home if we lose our jobs. But without mortgage insurance through our FHA loan, we would have never qualified to buy our home, as nobody would back us without guarantee that they'd get paid.
In other good news, we can request to get this insurance removed from the loan once we've paid back 20% of the amount we borrowed, or we can refinance altogether (renegotiating the terms of the loan) at that time if mortgage rates have lowered. For us, though, we secured a loan when interest rates were at historical lows so that may not help us out unless the government continues to institute special programs that reward long-term customers. FHA loans initiated after June 3, 2013 sadly don't have the option to remove mortgage insurance without refinancing due to new government regulations, so at this point most borrowers are better off saving by seeking out a more traditional loan with Private Mortgage Insurance.
What was your home-buying experience like? Did you have to get mortgage insurance to convince lenders to back you?