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What is mortgage insurance and how does it work?
A common question for many homebuyers is “what is mortgage insurance?”. The Consumer Financial Protection Bureau defines it as this:
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.
That’s a pretty good definition of mortgage insurance, but there are some details that are worth exploring. Mortgage insurance is calculated as a percentage of your loan balance. Most mortgage clients think of mortgage insurance as an additional part of their monthly payment. That can be true, but there are other options as well. Let’s break it down:
Federal Housing Administration (FHA) Mortgage
This program has a fixed percentage rate regardless of credit score or debt-to-income ratios. There can be some variability to the percentage if the down-payment made is more than the minimum required of 3.5%, but it’s currently 0.85% of the loan balance. FHA also charges an up-front mortgage insurance premium of 1.75% that is financed into the total loan amount.
US Department of Agriculture (USDA) Mortgage
This 0% down-payment mortgage is similar to FHA in that it has a fixed percentage rate and an up-front MI premium. The percentage for USDA mortgages is 0.35% and it has a 1% up-front MI premium financed into the loan amount.
Department of Veteran’s Affairs (VA) Mortgage
Our Veterans enjoy the privilege of a no down-payment loan that has no monthly MI! The VA mortgage does have an up-front MI premium that varies according to multiple factors such as type of service, down-payment amount, disability status, type of transaction, and first-time or subsequent use. It can be as low as 0% and as high as 3.6%.
Conventional loans with a less than 20% down-payment require MI provided by a private company. The percentages of these payments vary according to credit score, down-payment percentage, debt-to-income ratio, and transaction type. These MI premiums can be paid monthly, one-time at closing, or can be a lender paid premium. There can be instances where this type of MI can be cancelled.
It’s important work with a mortgage professional who can go over each type of loan, the MI required, and help you make a sound financial decision for you and your family. Call me today or Apply Online to see which program best fits your needs!