Did you know you may need mortgage insurance when purchasing a home?  Mortgage insurance (aka Mortgage Guarantee) is an insurance policy that covers lenders or investors for losses that occur when a borrower defaults on a mortgage.  Depending on the insurer, mortgage insurance can be public or private.  In most cases, lenders require mortgage insurance for mortgage loans which exceed 80% LTV (loan to value ratio) of the property’s sale price.  Due to the limited equity in the home, the lender requires that the borrower pay for mortgage insurance that protects the lender against their default.

            For example, you decide to purchase a home which costs $200,000.  You pay a 10% down payment ($20,000) and take out an $180,000 ($200,000-$20,000) mortgage on the remaining 90%.  The lender then requires the mortgage insurer to provide insurance coverage at, for example, 47% of the $180,000 ($84,600), leaving the lender with an exposure of $95,400.  The premium that the mortgage insurer will charge for this coverage will be paid by either you the borrower, or can be paid by the lender.  If you happen to default on your mortgage and the property is sold at a loss to the lender, the insurer will cover the first $84,600 of losses.  Percentage of coverage offered by mortgage insurers can vary from 37% to 78%.

            In order to obtain public mortgage insurance from the FHA (Federal Housing Administration), you must pay an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount at closing.  The UFMIP is usually financed in the loan and paid directly to the FHA on the borrower’s behalf.  There may also be a monthly mortgage insurance premium as well of 1.20%, depending on the loan to value ratio.

Give Consumer Mortgage a call today at 757-552-7000 or toll free at 800-882-0066 for your next purchase transaction so we can calculate the amount of mortgage insurance you’ll need!