December 7, 2023

Private Mortgage Insurance Favored over FHA as Borrowers Compare Costs

Issues Facing OriginatorsMortgage Solutions

Lower Costs at Closing and Over Time

Over the past five years, private mortgage insurance (private MI) has grown to become “the most common execution for low down payment borrowers,” according to an August Urban Institute report.

Conventional loans with PMI began outpacing the Federal Housing Administration (FHA) loan program in 2018, says the Washington, D.C.-based housing industry research organization. In 2022, private MI accounted for 42.7% of all insured loans — up from 34.6% in 2015, according to the report that includes FHA and VA loans in its “all insured loans” designation. FHA’s share of insured loans was 34% in 2022, down from 43.8% in 2015.

Lower Costs on a Monthly and Long-Term Basis

Why has private MI grown while FHA’s share has declined? The Urban Institute’s researchers don’t specifically address that question. However, the report offers examples of homebuyers with higher credit scores paying significantly less with private MI than with FHA — up front and over the life of their loans.

First-time homebuyers, in particular, are keenly focused on costs as they grapple with higher interest rates that make it more challenging to successfully purchase homes. As a result, lenders have an opportunity to stand out from the competition by marketing loans with private MI to help borrowers save money and access more flexible homebuying options.  

FHA can be the right choice for some borrowers. As CNET Money stated in October, an “FHA loan can … be a good option, especially if you have a low credit score or can’t afford to make a sizable down payment.”

Avoiding Lifetime Premiums

According to CNET Money, an important downside to FHA is that FHA’s Mortgage Insurance Premium (MIP) lasts throughout the loan’s lifetime for buyers making down payments of less than 10%. FHA borrowers who pay 10% or more down typically make monthly MIP payments for 11 years. On most loans, FHA also charges an upfront fee of 1.75% of the base loan amount, which can be paid at closing or folded into the loan. 

One key advantage of borrower-paid MI is it can be canceled (PDF) once a borrower has built enough equity, resulting in lower monthly payments over time. With new FHA loans, borrowers who make a down payment of 10% or less must continue paying the MIP over the life of the loan.

With Arch MI coverage, a typical pair of borrowers with good credit save more than $81 per month over FHA and gain more than $11,437 in savings over five years[1]. It’s easy to compare Arch MI to FHA by getting a quick, no-hassle RateStar® quote via your LOS/PPE or the portal.  

Lower Down Payments ­— and Lower Monthly Premiums with MI

Another notable advantage of private MI is its flexibility regarding down payments. While FHA loans require a minimum down payment of 3.5%, private MI allows borrowers to secure a conventional loan with down payments as low as 3%. With Arch Mortgage Guaranty Company (AMGC) coverage, homeownership is possible with down payments of less than 3%.

You can also buy down the MI with Arch MI’s RateStar BuydownSM tool, a useful advantage in a market where borrowers are aggressively rate-shopping. If your rate’s not the lowest, RateStar Buydown can be a “Deal Saver” because its ability to create custom MI premium payments can often mitigate a slightly higher rate. Borrowers may pay more up front ­— but save more over the long term. Check it out!

De-Stress the Down with MI

In a 2022 LendingTree survey, 81% of respondents who’ve never owned a home said they are “stressing about saving for a down payment.”[2] Adding to their anxiety, 41% of non-homeowners believe lenders require down payments of 20% or more — far above the 7% actual average down payment for first-time homebuyers.

Some other important advantages of private MI:

  • Arch MI allows higher LTVs than FHA.[3][2]
  • There’s less paperwork, faster originations and free MI underwriting help from our ASK Center.
  • Borrowers have more premium payment options: single, monthly or lender-paid.
  • And unlike FHA, we’ll cover eligible second homes.

We’d like to hear about your experiences deciding whether Arch MI or FHA best fits your borrower. Send us an email ([email protected]) to tell us how long it took you to compare — and how much your borrowers saved.

[1] Assumptions: Arch MI Borrower-Paid Monthly: Base loan amount $375,000, two borrowers, both with 750 credit scores, 41% DTI, 30-year fixed-rate purchase loan, single-family house, stable market, 95% LTV Arch MI and 96.5% LTV FHA and 7.785% initial note rate with MI and 7.375% with FHA. Life of loan is a 30-year amortized period, assuming on-time payments for 360 months, MI premium rate of 0.0029. MI premium rates will vary depending on borrower credit score and characteristics. RateStar® pricing as of Nov. 17, 2023. FHA Rate source: FHA Mortgagee MI Letter 2023-5.

[2] LendingTree survey, July 2022. 41% of Americans Who’ve Never Owned a Home Believe 20% Down Payments Are Required — And It Could Be Holding Them Back From Homeownership

[3] For additional details, please refer to Arch MI’s Underwriting Manual.