PMI is tougher to get, costs more

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Just because you can get a mortgage doesn't mean you can get private mortgage insurance.

Obtaining PMI has become a serious new hurdle for borrowers who don't have enough cash for a 20% down payment and can't get a home loan without it.

During the binge of reckless lending that led to the mortgage crisis, insurers happily accepted any borrower the banks and finance companies were willing to finance.

Now, a record number of those loans are in default and insurers are losing billions. They're imposing tougher standards than most banks and mortgage companies and insuring fewer loans.

Mortgage Guarantee Investment Corp., for example, is the nation's largest mortgage insurer.

It has lost money for nine consecutive quarters because almost 14% of the loans it insures are delinquent. As a result, MGIC is writing fewer than half as many new policies as it was just last year.

Private mortgage insurance protects lenders by paying off your loan if you default.

It's almost always required anytime someone borrows more than 80% of a home's market value.

The lender chooses the mortgage insurer, sets up the mortgage insurance policy and then tacks the monthly premium onto the mortgage payment.

At least that's how it's supposed to work.

But the insurance companies are taking a much more skeptical and thorough look at the borrowers they're being asked to back.

It's like having to have a mortgage application reviewed twice.

Some borrowers who win approval from their bank or finance company are being rejected for PMI because insurers are demanding higher credit scores and lower debt-to-income ratios than the lenders and imposing more restrictions on eligible loans and properties.

Investment homes, second homes, 2- to 4-unit properties and manufactured housing are usually not eligible for mortgage insurance.

A 5% down payment is the absolute minimum most insurers will accept, and they won't cover cash-out refinances, interest-only loans, negative amortization loans or pretty much any other type of loan that isn't a traditional fixed-rate mortgage.

The requirements are toughest in areas that have suffered the most from foreclosures and declining property values.

In California, Arizona, Florida, Michigan and Nevada, insurers routinely require a minimum down payment of 10%, a minimum FICO score of 720 and a debt-to-income ratio no higher than 45% for a single-family home. The minimum down payment increases to 15% for a condo.

Borrowers that are approved are paying higher premiums.

In June 2008, a borrower making a down payment of between 5% and 10% with a FICO score of 660 or higher paid an annual premium of 0.54% of the loan amount. That works out to $1,080 a year for a $200,000 mortgage.

By the end of 2008, a borrower making a 5% to 10% down payment with a FICO score of between 680 and 699 was paying 0.72% of the loan amount, or $1,440 a year for a $200,000 loan.

If you can't qualify for private mortgage insurance, try getting the federal government to back your loan.

FHA loans are available to borrowers with credit scores as low as 580 and higher debt-to-income ratios.

You must also pay an up-front premium and possibly monthly premiums for government-supplied mortgage insurance, but loans guaranteed by the Federal Housing Administration only require a 3.5% down payment.

VA loans are available to millions of veterans, including members of the National Guard and reserve units.

It's the most generous mortgage program around. VA loans require no down payment or mortgage insurance. They're open to borrowers with bad credit, yet the rates are reasonable.

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