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Navigate to: How does private mortgage insurance work? | Borrower benefits
If you don’t have a lot of experience with mortgages or the mortgage industry, “What is mortgage insurance?” is a big question to answer.
Typically, lenders and investors require mortgage insurance for loans with down payments of less than 20%. The most common types of mortgage insurance options are provided by either:
For that risk, the insurer collects a premium from the lender, who then typically recovers the cost of the premium from the borrower. The “risk” in private mortgage insurance is that a borrower may default on a loan, and that may ultimately result in the insurer having to pay a claim.
Private mortgage insurance is available on a wider variety of loan products and typically may be cancelled sooner than FHA mortgage insurance. FHA mortgage insurance is not cancellable, unless the borrower makes a down payment greater than 10%.
Private mortgage insurance is not mortgage life insurance, which pays off a mortgage if the homeowner dies or becomes disabled. It is not homeowners’ insurance, which protects homeowners from loss due to theft, fire or other disaster. Private mortgage insurance protects the lender and investor from loss, not the borrower.
Consider borrowers who purchase a $200,000 property with a fixed-rate mortgage. They make a 10% down payment and are required to use mortgage insurance to finance a $180,000 mortgage.
Typically, on a 90% LTV, fixed-rate mortgage, investors require 25% coverage, meaning, in the event of a claim, the mortgage insurer is responsible for paying 25% of the outstanding loan balance, leaving the lender at risk for 67.5%.
On an uninsured loan, the lender is at risk for the entire loan balance.
If, down the road, borrowers fail to repay their mortgage, the lender or investor files a claim based on the unpaid loan balance, delinquent interest and foreclosure costs.
Financing with mortgage insurance creates opportunities for your borrowers.
New to the mortgage business or looking to refresh your MI knowledge?
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