Alyssa Lane
Real estate mortgage insurance is an insurance policy that protects the lender or titleholder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. It is typically required when borrowers make a down payment of less than 20% of the purchase price of the home. The cost of mortgage insurance is included in the borrower's monthly mortgage payment and can increase the overall cost of the loan. It is important to note that mortgage insurance does not protect the borrower but helps them qualify for a loan that they might not otherwise be able to get.
| Characteristics | Values |
|---|---|
| Purpose | Protects the lender or titleholder against financial loss if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. |
| Who it protects | Mortgage insurance protects the lender, not the borrower. |
| When it is required | Typically required when borrowers make a down payment of less than 20%. Also required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. |
| Cost | The cost of mortgage insurance varies depending on the loan and down payment size, type of mortgage, and credit score. It can be included in the monthly mortgage payment or paid as a lump sum at closing. |
| Cancellation | Mortgage insurance can be cancelled once the borrower has paid off some of the loan or reached 20% equity in their home. |
| Types | Private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, mortgage title insurance, and mortgage life insurance. |
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What You'll Learn
Private mortgage insurance (PMI)
PMI can be paid in a few different ways. Sometimes, it is paid as a one-time upfront premium at closing, which is shown on the Loan Estimate and Closing Disclosure. Alternatively, it can be paid with both upfront and monthly premiums. The monthly premium is added to the borrower's monthly mortgage payment. Lenders may offer multiple options for paying PMI, so it is important to ask the loan officer to help calculate the total costs over different timeframes to determine the best option.
The amount paid for PMI depends on the loan and down payment size, the type of mortgage (fixed-rate or adjustable-rate), and the borrower's credit score. For example, those with a credit score between 620 and 639 may pay PMI of up to 1.5% of the loan amount, while those with a credit score of 760 or higher may pay as little as 0.46%. PMI can be cancelled once the mortgage balance reaches 80% of the home's value, or when the borrower is halfway through their loan term, whichever comes first. Federal law dictates that the lender must automatically end PMI when the loan-to-value (LTV) ratio drops to 78% or when the borrower is one month past the midpoint of their loan term.
PMI can help borrowers qualify for a loan that they may not have otherwise been able to obtain. However, it increases the overall cost of the loan. Therefore, it may be beneficial for borrowers to save up for a 20% down payment to avoid the need for PMI and potentially obtain a lower interest rate.
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Mortgage title insurance
Mortgage insurance is a type of insurance that protects the lender or titleholder if the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. It lowers the risk to the lender of making a loan to the borrower, allowing them to qualify for a loan they might not otherwise be able to get. However, it increases the cost of the loan for the borrower.
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Federal Housing Administration (FHA) loans
Mortgage insurance is an insurance policy that protects the lender or titleholder in the event that the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. It is typically required for borrowers who make a down payment of less than 20% of the purchase price of the home.
FHA loans are available for single-family, multifamily, manufactured home, and hospital loans made by FHA-approved lenders throughout the United States and its territories. To be eligible for an FHA loan, borrowers typically need to make a down payment of at least 3.5% of the purchase price of the home. This is significantly lower than the standard 20% down payment required by many conventional loans.
FHA mortgage insurance is required for all FHA loans. It costs the same regardless of the borrower's credit score, with a slight increase for down payments of less than 5%. FHA mortgage insurance includes both an upfront cost, paid as part of the closing costs, and a monthly cost included in the borrower's monthly payments. Borrowers who cannot afford to pay the upfront fee out of pocket can choose to roll it into their mortgage, although this will increase the overall cost of the loan.
FHA loans are particularly beneficial for first-time homebuyers, seniors, and those with low loan balances or who live in manufactured or mobile homes. FHA-approved lenders and housing counsellors can provide more information about FHA loan products and help determine eligibility.
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Department of Veterans' Affairs (VA)-backed loans
Mortgage insurance is an insurance policy that protects a lender or title holder in the event that the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. It is usually required when the borrower makes a down payment of less than 20% of the total mortgage amount.
Department of Veterans Affairs (VA)-backed loans
VA-backed loans are mortgage options backed by the Department of Veterans Affairs. They are available to veterans, service members, and their spouses. VA-backed loans are obtained through a lender of the applicant's choice, once they obtain a Certificate of Eligibility (COE).
VA-backed loans do not require a down payment or mortgage insurance. Instead, borrowers are required to pay an upfront "funding fee", which can be rolled into the mortgage. This fee varies based on different factors.
VA-backed loans also offer competitive interest rates and flexible credit guidelines. They are capped at how much lenders can charge veterans to originate and process a loan. Sellers can pay all of a buyer's closing costs and up to 4% of the loan amount in concessions.
VA loans have been the safest loan on the market for most of the last 18 years, according to foreclosure data from the Mortgage Bankers Association.
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When mortgage insurance is required
Mortgage insurance is an insurance policy that protects a lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. It is not always required, but when it is, it can be included in your monthly payments or paid upfront as part of your closing costs.
Private mortgage insurance (PMI) is required when the borrower makes a down payment of less than 20% of the purchase price of the home. The amount you pay for PMI depends on your loan, down payment size, credit score, and other factors. You can request to cancel PMI when your mortgage balance reaches 80% of your home's value.
Mortgage insurance is also typically required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. FHA mortgage insurance includes an upfront cost and a monthly cost, while USDA loans have an upfront guarantee fee and an annual fee.
Additionally, your lender may require flood insurance for homes in government-designated flood zones. While it may not be mandatory, investing in flood insurance can provide extra protection in areas prone to flooding.
Before purchasing a home, it is important to consider the various types of insurance that may be required and work with your lender to estimate these costs.
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Frequently asked questions
Mortgage insurance is an insurance policy that protects a lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.
Mortgage insurance is typically required when borrowers make lower down payments. Usually, if a borrower is making a down payment of less than 20%, they are required to pay for mortgage insurance.
Three types of mortgage insurance include private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, and mortgage title insurance.
Mortgage insurance can be paid in monthly instalments or as a lump sum. While it lowers the risk for lenders, it increases the cost of the loan for borrowers.
