What Is Lender Paid Mortgage Insurance And How Does It Work

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This BLOG On Lender Paid Mortgage Insurance And How Does It Work Was UPDATED And PUBLISHED On January 23rd, 2020

What Is Lender Paid Mortgage Insurance
Gustan Cho Associates

Lender Paid Mortgage Insurance And How It Works:

  • Lender Paid Mortgage Insurance is also referred to as LPMI
  • Lender Paid Mortgage Insurance applies to Conventional Loans only
  • Private Mortgage Insurance is required for all Conventional Loans with less than 20% down payment
  • However, Conventional Borrowers now do not have to pay Private Mortgage Insurance premium if they opt to choose a product called Lender Paid Mortgage Insurance
    • Or also known as LPMI
    • Borrowers who choose Lender Paid Mortgage Insurance do not have to pay monthly PMI or private mortgage insurance premium

In this article, we will cover and discuss how lender private mortgage insurance works on conventional loans.

What Is Lender Paid Mortgage Insurance And Why Is PMI Required?

There are two types of mortgage insurance premiums required with FHA Loans.

  • A one time upfront FHA mortgage insurance premium
  • The second type of mortgage insurance is lifetime annual mortgage insurance premium for the life of the FHA Loan:
    • Annual FHA MIP is 085% of the loan balance
    • Annual FHA MIP is divided up by 12 payments and is part of borrowers monthly mortgage payment
    • With Conventional Loans, borrowers who put 20% or more down payment, the private mortgage insurance premium is not required
    • However, the private mortgage insurance premium is required for any home buyers who purchase a home with Conventional Loan but puts less than 20% down payment
    • There is no fixed percentage on private mortgage insurance premiums
    • Many factors play into how much the private mortgage insurance premium will be

Here are some of the factors:

  • Amount of down payment
  • Type of property
  • Credit scores

How Does Mortgage Insurance Work

How Does Mortgage Insurance Work

The purpose of Private Mortgage Insurance is to protect lenders in the event if the borrower defaults:

  • If property goes into foreclosure, the mortgage insurance company covers lenders on the loss
  • Reason HUD requires FHA mortgage insurance premium is to insure lenders in the event borrowers default on their loans
  • Without the borrower putting a substantial down payment, lenders are at risk in the event if the borrower were to default and the property goes into foreclosure
  • Mortgage Insurance protects the lender from losses if the borrowers were to default on their loan
  • All Conventional Loans where the loan to value or LTV is greater than 80% LTV, mortgage insurance is required
  • Cost of private mortgage insurance is paid by the borrowers
  • The monthly mortgage insurance is added to the borrower’s monthly mortgage loan payment

How Does LPMI Work?

Many borrowers do not like the fact that they need to make an added payment to their monthly mortgage payment such as private mortgage insurance.

  • Lender Paid Mortgage Insurance is an option conventional mortgage borrowers have
  • Lender Paid Mortgage Insurance has been created and launched to satisfy borrowers who do not want to make that extra additional monthly payment on top of their regular monthly mortgage payment
  • Lenders cover private mortgage insurance
  • Lenders can pay the LMPI in a one lump amount when the Conventional Loan closes
  • Borrowers no longer need to worry about the private mortgage insurance premium

Types Of Mortgage Insurance

What are the types of mortgage insurance?

What Is Lender Paid Mortgage Insurance? See below:

There are two types of Lender Paid Mortgage Insurance:

  • The borrower can pay upfront lender paid mortgage insurance
  • The one time upfront private mortgage insurance premium can be paid with sellers concessions
  • The lender can give a lender credit and cover lender paid mortgage insurance
  • This type of LPMI is covered by lenders
  • Borrowers do not have to pay any monthly private mortgage insurance premium
  • However, nothing is free in the mortgage world
  • The lender pays for the monthly LPMI premium in lieu of a higher mortgage rate charged to the Conventional Loan borrower
  • Lender Paid Mortgage Insurance is available for borrowers with at least a 680 credit score

Lender Paid Mortgage Insurance Versus Borrower Paid Mortgage Insurance

Benefits of lender paid mortgage insurance versus borrower-paid mortgage insurance?

We have covered what LPMI is. Now, what is Borrower Paid Mortgage Insurance? This is what borrower is:

  • The borrower pays annual private mortgage insurance if the loan to value is greater than 80%
  • Private mortgage insurance will terminate automatically once the loan to value of conventional loan hits 78% LTV
  • Borrowers can request to remove the private mortgage insurance at 80% LTV
  • Borrowers who feel that their homes appreciated substantially and have more than 20% equity, can request for an appraisal
  • If f they have sufficient equity, their private mortgage insurance will be removed
  • A one time upfront private mortgage insurance premium is expensive
  • It can be more than 2% of the loan amount
  • Lender Paid Mortgage Insurance is not free and LPMI is offered in lieu of higher mortgage rates
  • Rates can be 1.0% or higher sometimes
  • Borrower paid mortgage insurance is like annual FHA mortgage insurance premium
  • It is part of the borrower’s monthly mortgage payment
  • The great news is that borrower-paid mortgage insurance is not required for the lifetime of the loan term like FHA Loans
  • It can drop off when your mortgage loan gets down to 78% Loan To Value

There are a lot of variables on which private mortgage insurance plan is best for borrowers. Discuss it with a loan officer. See what is the best mortgage insurance program is best suited to you is depending on how long you are planning on keeping your home.

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