Mortgage insurance is a policy that protects the lender in case a borrower stops making payments on a home loan. It’s usually required for loans when the down payment is below a certain threshold because in those circumstances the lender’s liability is greater, especially in case of loan default.
The premium for the coverage is typically a monthly cost rolled into the monthly home loan payment, the closing costs, or both. Not all home loans require mortgage insurance. It typically depends on the creditworthiness of the borrower or how much of a down payment the borrower makes on the home loan. Lenders establish their own requirements for mortgage insurance, but a common rule of thumb is that borrowers making less than a 20% down payment will typically pay mortgage insurance for their home loan.
Let’s take a look at home mortgage insurance works with various kinds of loans
While mortgage insurance is a cost to the borrower, it also expands opportunity.
Conventional Home Loans
The most popular type of home loan is a conventional mortgage. Typically, if a borrower makes a down payment of less than 15% or 20%, then that borrower must purchase private mortgage insurance (PMI). The amount paid down and a borrower’s credit score can affect the cost of the private mortgage insurance. Sometimes borrowers can cancel PMI when their principal on the home loan reaches or exceeds 20%.
USDA Home Loans
All borrowers in the United States Department of Agriculture loan program must pay mortgage insurance. Fortunately, the coverage is affordable. It typically comes with a closing cost fee and a monthly premium.
FHA Home Loans
With a Federal Housing Administration loan, or FHA loan, all borrowers pay mortgage insurance. The mortgage insurance comes with a fee paid up front at closing as well as a monthly premium. The cost of the premium is only decreased if the borrower pays more than 5% in down payment.
VA Home Loans
In the instance of home loans backed by the Department of Veterans’ Affairs, it’s the VA guarantee that is serving the purpose of mortgage insurance. For these loans, there is no monthly premium but there is a funding fee that borrowers pay at closing. The fee can vary based on the borrower’s military service, down payment, and other qualifications.
While mortgage insurance is a cost to the borrower, it also expands opportunity. Borrowers who might not otherwise qualify – due to lack of cash for a large down payment – can live the dream of home ownership thanks to mortgage insurance. Contact the friendly experts at Crystal Clear Mortgage for more insights and assistance with choosing a home loan that’s right for you.