What is Mortgage Insurance?
Mortgage Insurance, sometimes referred to as Private Mortgage Insurance, is an essential element of the home buying process. By making it possible for a homebuyer who does not meet the qualifications to receive a mortgage loan, mortgage insurance, provides assurance to the lender in the event that the borrower is unable to continue making their mortgage payments.
Mortgage Insurance, therefore, lowers the risk to the lender of loaning to an unqualified borrower and benefits the borrower by making it possible for them to receive a mortgage loan and purchase a home, they would otherwise be unable to purchase.
There are many types of loan programs that require mortgage insurance, and some that allow borrowers to roll insurance premiums into their monthly mortgage payments. To help you decipher which programs require which types of insurance plans, we’ve compiled a list for you below!
- Conventional Loans. Conventional loans require private mortgage insurance and vary depending on the amount you put down and your credit score. Insurance payments are made monthly and have little or no cost due at closing. One of the perks of conventional loans regarding mortgage insurance is that homebuyers – who put less than 20% down – can cancel their insurance once they own 20% equity in their home.
- FHA Loans. Though mortgage insurance is required for FHA loans, it differs from conventional loans as it does not depend on a borrower’s credit score. For this type of loan, insurance premiums change if a borrower puts less than 5% for their down payment. For FHA loans, insurance is included in the upfront cost, closing costs, and monthly payments.
- USDA Loans. Like an FHA loan, a USDA loan with an insurance premium includes costs at closing as well as in monthly payments. However, USDA loans typically have a lower insurance rate than FHA loans.
It is important to note that for both FHA and USDA loans, the borrower has the option to roll the upfront portion of their insurance premiums into their monthly mortgage payments, rather than paying out of pocket. However, this option will increase both the borrower’s loan amount and overall costs.
- VA Loans. A much different type of loan program from the rest, VA loans are not required to have monthly insurance premiums, however, they do require an upfront funding fee that is based on a few factors.
These are, type of military service of the borrowers, the amount the borrower can put towards their down payment, disability status, whether they are buying or refinancing their home, and whether or not it is their first VA loan.
Like in the case of FHA and USDA loans, borrowers can roll this upfront funding fee into their monthly mortgage payments, but it will increase their loan amount and overall costs.