Mortgage Information

Mortgage insurance. What is it? Who has to have it? How can it be avoided? I get a lot of questions about mortgage insurance, so let’s talk about it.


     In general, there are two types of mortgage insurance: mortgage insurance bought from the government for government loans (this is called mortgage insurance premiums or MIP) or private mortgage insurance for conventional loans which is bought from the private sector (this is called private mortgage insurance or PMI). 


     For Conventional financing, mortgage lenders require borrowers who don’t have 20% to put down on a home purchase private mortgage insurance (PMI) to protect the lender if the borrower is unable to pay the mortgage. In other words, PMI guarantees the lender will get paid if the buyers are unable to pay their mortgage payments and default on the loan. For the borrower, it has a benefit, too: Getting private mortgage insurance allows them to purchase a home before they have the full 20 percent of the home’s value saved up for a down payment.


     Conventional borrowers can pay MI several ways. It can be paid monthly, up front (in with closing costs) or a combo of both (known as a split premium). Many think that the MI is ONLY available as a monthly option, which increases the mortgage payment. This is inaccurate. Make sure your borrowers who are obtaining conventional financing know they have options for their MI!


     You are typically required to pay a private mortgage insurance premium on a conventional loan for as many months or years it takes to build enough equity in your home to equal 20 percent of your home’s value and have a loan-to-value ratio of 80 percent. While the MI can be removed from a loan at that point (by requesting it be removed), it does not automatically fall off until the loan to value reaches 78%.


     For government loans (FHA and USDA), MI is required regardless of the down payment. In addition to monthly mortgage insurance, FHA loans require Upfront Mortgage Insurance Premiums of 1.75%. This premium is typically financed into the loan. For homeowners with FHA loans, a mortgage insurance premium (MIP) is required for the life of the loan policy, which is up to 30 years.


     USDA requires a 1% Funding Fee that is also normally financed into the loan, in addition to their low monthly MI

     Hopefully you have a general overview of mortgage insurance. Especially in regards to Conventional mortgage insurance, it’s important to know you have options!