Mortgage insurance is insurance that the borrower must purchase for the lender. Mortgage insurance is sold to borrowers who are a higher risk for the lender. The insurer agrees to sell insurance to cover the lender in the case of non-payment by the insured. The home buyer must pay for the policy and if he/she does not fulfill the mortgage obligation while the insurance is in effect, the insurance will pay the lender the principal owed. Eligibility requirements for this insurance change with the type loan the borrower is qualified for. The borrower may qualify for government backed loans such as VA or FHA and mortgage insurance is made available. If the borrower is taking out a loan that is not backed by the government then a product called Private Mortgage Insurance (PMI) is made available.
There are different eligibility requirements for each of these insurances. The amount of down payment on the loan is generally what determines whether or not the borrower will have to carry insurance. For government backed loans like FHA your down payment can be as low as 3.5% of the value of the home and you will qualify for the note. You will be required to carry mortgage insurance. On other notes that are not government backed the lender will want 20% down or will require PMI on the note.
Not only is down payment a factor, but also the condition of the home purchased. The home has to be livable. That is, there must be adequate utilities, have a heating unit, have no serious damage to the structure and the borrower must live in the home. If the home does not meet these requirements the repairs must be made before the loan is approved and mortgage insurance will issue a policy on the home.
Private lenders and PMI have some restrictions as well. The borrower must plan on living in the home. The loan cannot be for greater than 40 years. When 78% of the loan remains to be paid the lender must drop the PMI if the buyer has kept the payments current and has a positive credit history. The insurance is approved for ARM’s and for fixed rate loans, but not for reverse mortgages.
The lender requires the insurance and will manage the insurance through payments made on the mortgage. This costs the lender so the lender will only require the payments through the riskiest part of the loan repayment plan. This will be up until the borrower has 20% equity in the house in a lot of cases. If the payment history on the note is poor then the borrower will have to have at least 22% equity before the lender will agree to remove the mortgage insurance coverage requirement. If you want to apply for removal of the insurance at 80% of your loan then you need to make sure that you pay your mortgage payments on time. If you are late, don’t go past 30 days. The lender will review your history, especially the prior one or two years and evaluate whether you can drop the insurance.