What is Mortgage Insurance

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 as a common rule of thumb, borrowers who make a smaller down payment will typically pay mortgage insurance for their home loan.

Let’s take a look at how mortgage insurance works with various kinds of loans.

Conventional Home Loans

The most popular type of home loan is a conventional mortgage. Typically, if a borrower’s down payment is below the lender’s threshold, 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 once they have built enough equity in the home.

USDA Home Loans

All borrowers in the United States Department of Agriculture loan program must pay mortgage insurance. 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 may be lower when the borrower makes a larger 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. Learn more about VA home loans.

Why it matters

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. Our article on down payments covers the other half of the question.