Buying a house? New PMI Rules!

This is another personal experience that I will share for those of you looking to buy a house in the near future. With the recent rash of foreclosures and bad deals the entire industry is buttoning down. It is a LOT harder than it was a couple years ago.

A little background on my scenario:

I am buying a 3 bedroom, 1.5 bath town home here in the Atlanta area. It is a foreclosure that needs work. I can put up to 5% down on the property with my savings. This puts me in the situation that I would need PMI or Private Mortgage Insurance.

I was informed that my credit score was not high enough to be able to obtain PMI. As it turns out the insurers are really getting hit hard now and they raised their minimum credit score to get PMI. I was blind-sided by this and had to change to an FHA loan last minute.

If you are unable to qualify for PMI and you don't have 20% to put down you are left no choice except to get a government sponsored (read: insured) loan. You still pay "mortgage insurance" but instead of private it is provided by the US Government. I am personally using an FHA loan with 3.5% down since I am a first time home buyer. My interest rate ended up being lower too!

This came as a complete surprise to me so I thought I should share my experience here. I will soon be rid of the insurance as once I get the house, do the repairs and upgrade, and get a new appraisal I will have more than 20% equity. This is a temporary headache (I hope!).

Since I am buying the house through a normal FHA loan I have to pass a HUD inspection. This put me in the unique situation where I have to do repairs on a house I do not yet own. The only reason I am doing this is that once the work is done on the home I should have close to $50,000 in equity. Worth the risk in my opinion.

If you are in the market for a home and will need PMI keep this information in mind. It would be heartbreaking to find a place you like to only find out 2 weeks away from closing that you cannot get it and have the whole deal fall through.