Mortgage insurance is insurance paid for by the borrower to protect the lender if the borrower defaults on the mortgage. It does not protect the borrower, but it may allow a borrower to buy a home with less than 20% down on certain loan types.
What Is Mortgage Insurance and Why Do Some Homebuyers Need It?
When buying a home, one of the biggest questions borrowers often ask is: Do I need mortgage insurance?
In many cases, if you make a down payment of less than 20% on a conventional conforming loan, your lender may require the loan to be insured in some way. This is where mortgage insurance comes in.
Mortgage insurance can be an important part of the home loan process because it helps make homeownership possible for buyers who may not have a full 20% down payment saved.
What Is Mortgage Insurance?
Mortgage insurance is insurance paid for by the borrower to a third-party mortgage insurance company to help protect the lender from financial loss if the borrower defaults on the loan.
It is important to understand that mortgage insurance does not protect the borrower. Instead, it protects the lender.
The main benefit to the borrower is that mortgage insurance may allow them to purchase a home with less money down.
Why Is 20% Down Considered Important?
You may have heard that putting 20% down on a home can help you avoid mortgage insurance. That is because 20% is often considered the “magic number” in mortgage lending.
Generally, when a borrower puts down less than 20% on a conventional conforming loan, the lender has more risk. Mortgage insurance helps reduce that risk for the lender.
For many buyers, saving a full 20% down payment can take years. Mortgage insurance may help qualified borrowers buy sooner instead of waiting until they have a larger down payment.
Does Mortgage Insurance Protect the Borrower?
No. Mortgage insurance does not protect the borrower.
This is one of the most common misunderstandings about mortgage insurance. Even though the borrower usually pays for it, the insurance is designed to protect the lender if the borrower defaults on the mortgage.
However, mortgage insurance can still benefit the borrower indirectly because it may open the door to loan options that require less than 20% down.
When Is Mortgage Insurance Required?
Mortgage insurance is commonly required when a borrower makes a down payment of less than 20% on certain conventional loans.
However, mortgage insurance requirements can vary depending on:
- The loan type
- The down payment amount
- The borrower’s credit profile
- The lender’s guidelines
- The overall mortgage program
Some loans may require mortgage insurance, some may not require it, and with certain loan types, it may not be avoidable.
Are There Different Types of Mortgage Insurance?
Yes. There are different forms of mortgage insurance, and the right option depends on your specific loan program and financial situation.
Some mortgage insurance may be paid monthly as part of your mortgage payment. Other options may involve different payment structures depending on the loan type and lender guidelines.
Because mortgage insurance can vary, it is a good idea to speak with a mortgage loan originator who can explain your options clearly.
Can You Avoid Mortgage Insurance?
In some cases, yes. Borrowers may be able to avoid mortgage insurance by putting at least 20% down on a conventional loan.
However, that is not always the best choice for every buyer. Some borrowers prefer to keep more money available for moving costs, repairs, emergency savings, or other financial goals.
The best option depends on your complete financial picture.
Why Mortgage Insurance Can Be Helpful for Homebuyers
While many borrowers would prefer not to pay mortgage insurance, it can serve an important purpose.
Mortgage insurance may help qualified buyers:
- Purchase a home with less than 20% down
- Enter the housing market sooner
- Preserve cash for other expenses
- Qualify for certain loan options
- Avoid waiting years to save a larger down payment
For the right borrower, mortgage insurance can be a useful tool in the homebuying process.
Talk to a Mortgage Professional About Your Options
There are many different forms of mortgage insurance. Some loans do not require it, and with some loans, it cannot be avoided.
That is why it is recommended that you contact a mortgage loan originator at Morgan Financial to review your options and choose the home loan program best suited for your specific situation.
Final Thoughts
Mortgage insurance is insurance paid by the borrower to help protect the lender from default. It does not protect the borrower directly, but it may allow borrowers to purchase a home with less than 20% down on certain loan types.
Do you have a home loan related question that you want answered? We want to hear from you.
Contact Morgan Financial today to speak with a mortgage professional about your options.
