Mortgage insurance serves as a means of indemnity, which protects a lender, otherwise known as a mortgagee, against incurring a loss from a possible default in payments by a borrower(mortgagor). These defaults could result from unmet costs, unattended mortgage contract agreements, or even a borrower’s death. Mortgage insurance is particularly for clients who cannot afford the 20 percent down payment, which targets the purchase price on a conventional mortgage (a home loan that is not federally insured or guaranteed).
When is mortgage insurance required?
Mortgage insurance is required and included in contracts involving lower-income clients who cannot afford the 20 percent down payment from the total purchase price for any home they intend to take out a mortgage.
Who bears the cost?
The borrower bears the cost of mortgage insurance, but it protects the lender. Borrowers are still liable for the loan if they can’t pay up and might end up losing the home in foreclosure if they fall behind on the payments. Mind you, this dramatically differs from mortgage life insurance, which pays off a borrower's remaining mortgage upon their death, or mortgage disability insurance, which puts an end to the mortgage if a borrower becomes disabled.
Types of Mortgage Insurance.
Two types of mortgage insurance are explained here. They are:
i. Private Mortgage Insurance (PMI).
ii. Federal Housing Administration (FHA) Mortgage Insurance.
- Private Mortgage Insurance (PMI)
This type of insurance is organized when one gets a conventional loan with less than a 20% down payment. Here, a lender arranges mortgage insurance with a private company whose rates vary by down payment amount and credit scores. This type of insurance is usually paid monthly, with little or no initial payment required at closing, and canceled under specified circumstances. However, borrowers will have to pay their PMI until they accumulate enough equity in the home that the mortgagee can waive off any high-risk concern about their payments.
- Federal Housing Administration (FHA) Mortgage Insurance
FHA's insurance is one requirement for all FHA loans. Aside from down payments that are less than 5%, all other credit scores for such loans are the same. A client is allowed to roll the insurance fee into their mortgage instead of paying out of pocket when they don't have enough money on hand to pay it upfront.
How Is this Insurance Paid?
The payment for mortgage insurance could either be at the time of the contract agreement or as the need arises. All is dependent on the lender, the program, and the borrower's down payment options.
Although mortgage insurance protects the lender and not the borrower, it still has benefits for both parties. Here are a few:
● By allowing for smaller down payments, it provides the borrower faster access to the house.
● It allows for a broader range of loan options for the lender to present to low-income clients.
● It provides a broader selection of payment options.
Key points to note
● Mortgage Insurance protects a lender, otherwise known as a mortgagee, against incurring a loss from a possible default in payments by a borrower.
● Only low-income clients who can't afford the 20 percent down payment for a conventional mortgage at the point of contract agreement are required to pay mortgage insurance.
Can you avoid this insurance?
Some mortgage programs without insurance still consider clients with less down payment than the required twenty percent, especially the first-timers. One could search for such programs when trying to avoid mortgage loans.
If one can afford the twenty percent down payment, there will also be no need for mortgage insurance.
Some mortgages, backed by the U.S. Department of Agriculture, and VA mortgages, supported by the U.S. Department of Veterans Affairs, do not require mortgage insurance. But they do have fees to protect lenders in case borrowers default, so one will still pay an extra cost with these home loans in exchange for a lesser down payment prerequisite.
If you're a low-income client who can't afford the twenty percent down payment for a conventional mortgage, then you should consider mortgage loans. It not only provides more options for both lenders and borrowers, but it also presents an opportunity for low-income earners to be able to afford a home with a smaller down payment.