Although the SingleFile mortgage is not a junior loan, it is included here because it is an alternative to getting a junior loan (piggyback) in order to avoid PMI. It is offered to lenders by Mortgage Guarantee Insurance Corporation (MGIC), America’s largest volume home mortgage insurer. If it interests you, find a lender that offers it. Check the usual places, banks, credit unions, and mortgage brokers. Also, read the information available from MGIC’s website at www.mgichome.com/consumer/singlefile.html. The SingleFile is lender-paid mortgage insurance (LPMI). The lender, instead of the borrower, pays the mortgage insurance premium and then charges the borrower higher interest to make up the cost.
It is unclear at this time, even to MGIC, how much information must be disclosed to the borrower under the Home Ownership and Equity Protection Act. Because of this, you have to ask the right questions. You want to compare the cost to the lower interest rate with PMI, as well as the cost compared to the piggyback. There is not the same policy of the refund once the loan gets to 80% or 78%. See if there is the possibility of an interest rate decrease after the loan is paid down. There are several LPMIs besides the SingleFile. Ask which one your lender is using. There is no refund on the SingleFile as there would be if PMI were paid up front by the borrower, or payment reduction as there would be if PMI were financed.
An added cost to this mortgage is the amount of insurance that your lender requires. On a 100% loan, your lender can buy insurance to cover 20%, 25%, 30%, or 35% of the loan amount. Depending on your loan-to-value ratio and the length of your term, the difference can be over half a point. A lender requiring 20% coverage does not have to charge you as much interest as a lender requiring 35% coverage.
The loan targets borrowers with little cash, good credit, and good income-to-debt ratios. Since many borrowers with little cash often do not have the other two requirements, it is not for everyone. You must have a minimum FICO score of 700–720 for some LPMI programs, and an income-to-debt ratio of no more than 45%. This means that your debts, including your new mortgage debt, are not more than 45% of your gross income.
Under this program, a borrower can pay less than 20% down, all the way to zero down. As previously discussed, the required private mortgage insurance is paid as additional interest, rather than separately. The advantage is that this payment is now tax deductible. Private mortgage insurance paid separately is not.
The program is offered to compete with the piggyback loan and can save you money in some cases. For example, if you intend to pay off the piggyback in a year or two, you are better off with the piggyback. You avoid private mortgage insurance and the higher interest on the piggyback will only last for a short period. If you are going to simply make the required minimum payments on any loan you get, the SingleFile can save you more money with a lower interest rate than with the piggyback. As usual, it is not clear which loan is best for you unless you can accurately predict your financial future. As with any loans you are comparing, check the cost of getting the loan (points and fees), the cost over the life of the loan (interest rate), and the cost of paying off the loan (fees and prepayment penalties).
There are other loans with no down payment. You can get a 100% loan and even finance your closing costs up to 3% of the loan amount. Your interest rate will be higher than if you pay your own closing costs. As previously discussed, the 80/20 piggyback loan has one major advantage over the SingleFile, as it can be used to reduce your payment. You can take a thirty-year first loan for 80% and a ten-year second loan for 20%. After ten years, the 20% loan is paid off, and the next twenty years require a payment based on only 80% of the amount that you originally borrowed. If you used the 100% SingleFile loan, you would make your payment for thirty years based on 100% of the amount originally borrowed. Both of these loan programs offer fixed interest rates.