Understanding Mortgage Insurance For First Time Home Buyers
This BLOG On Understanding Mortgage Insurance For First Time Home Buyers Was UPDATED On October 25th, 2018
Understanding Mortgage Insurance:
Most folks do not apply for home loans often:
- Most people may only purchase two to three homes in their lifetimes
- Unfortunately, the mortgage process is a very complex process
- Can often be confusing to even home buyers who have gone through the mortgage application process many times before
The whole mortgage industry went through a major overhaul after the 2008 Mortgage And Real Estate Collapse.
In this article, we will discuss and cover Understanding Mortgage Insurance For First Time Home Buyers.
New Rules And Mortgage Regulations
New rules and mortgage regulations were created and implemented:
- A large percentage of loan originators and real estate agents left the field right after the 2008 Real Estate And Mortgage Meltdown
- This was because the mortgage and real estate industry came to a complete stand still
- Many real estate professionals and mortgage professionals who have been in the business for decades and left the industry and who are coming back need to get fully re-trained
- They need to learn the industry due to so many changes
- Understanding Mortgage Insurance can be quite complex
One of the most common questions from consumers is about the following important sections of mortgage insurance:
- mortgage insurance
- how mortgage insurance works
- is mortgage insurance mandatory
- who benefits from mortgage insurance
- understanding mortgage insurance
When Is Mortgage Insurance Required
There are several types of mortgage insurance and in this article, we will help our viewers understanding mortgage insurance.
- FHA, USDA, and VA have upfront mortgage insurance premiums
- FHA and USDA also have annual mortgage insurance premiums
- A version of upfront mortgage insurance is called the VA Funding Fee
- VA does not require annual mortgage insurance premium
- Conventional Loans also called conforming loans, require private mortgage insurance on mortgage loan borrowers who have less than 20% equity on their home loans or greater than 80% Loan To Value
- Mortgage insurance is mandatory by lenders on all government loans and conforming loans with less than 20% equity
- Borrowers need to pay for it for the benefit of the lender
Mortgage Insurance is another fee that the homeowner needs to pay monthly as a housing expense.
Mortgage Insurance Required By Lenders
Private Mortgage Insurance is mandatory by Lenders when a mortgage loan has a loan to value of higher than 80%.
- This is when a home buyer does not have the 20% down payment on a home purchase on a home
The reason lenders require private mortgage insurance is due to the following:
- if home buyers do not put at least 20% down payment on a home purchase
- is in the event of borrowers defaults on their home loan
- the private mortgage insurance company will protect the lender against the default of the mortgage loan
Understanding Mortgage Insurance, again, may not make sense. PMI will not benefit the homeowner. Borrowers need to take some time in understanding mortgage insurance basics.
What Types Of Mortgage Loans Require Mortgage Insurance
The two types of mortgage insurance borrowers will encounter are private mortgage insurance, also referred to as PMI, and mortgage insurance premium, which is referred to as MIP.
- Private Mortgage Insurance, PMI, is for conforming loans
- Lenders require private mortgage insurance in order to protect themselves from borrower default
- Fannie Mae has 3% down payment conventional loan programs first time home buyers
- Freddie Mac has the 3% down payment conventional loan programs for homebuyers who have not owned a home for at least the past three years
Conventional loan programs require a 5% down payment on the home purchase and require minimum credit scores of 620.
FHA Mortgage Insurance Premium
Mortgage Insurance Premium is required on all FHA Loans.
- FHA Loans require upfront FHA Mortgage Insurance Premium, which is a one time 1.75% fee of the mortgage balance and this charge is rolled into the mortgage loan
- The borrower does not have to come up with this fee out of pocket
- FHA also requires FHA annual mortgage insurance premium of 0.85% on all FHA loans no matter how much the home buyer’s down payment is
HUD is a governmental agency and insures all FHA Loans to lenders who originate and fund FHA Loans and follow FHA Guidelines.
How Can Mortgage Insurance Be Avoided?
The only way to avoid private mortgage insurance with conventional loans is to put a 20% down payment on a home purchase. There are conventional loan programs called Lender Paid Mortgage Insurance.
LPMI requires no private mortgage insurance is required on conventional loans in lieu of a higher mortgage rate. Many times, it is better and cost-efficient for borrowers to pay private mortgage insurance on a conventional loan instead of going with a Lender Paid Mortgage Insurance conventional loan. The mortgage loan originator will go through which is a better program for consumers. With 30-year FHA fixed-rate mortgage loans, annual FHA mortgage insurance premium is mandatory no matter how much down payment homebuyers put down.