Mortgage insurance is a policy that protects lenders against losses if a borrower defaults on their mortgage. It’s typically required for borrowers who make a down payment of less than 20% of the home’s purchase price. Here are the key points about mortgage insurance requirements:
Private Mortgage Insurance (PMI):
Conventional Loans
For conventional loans, PMI is required if your down payment is less than 20%. The cost of PMI varies based on your loan-to-value ratio (LTV) and credit score. PMI can be paid monthly, as a one-time upfront premium, or a combination of both12.
Cancellation: PMI can be canceled once you reach 20% equity in your home. This can be achieved through paying down your mortgage or an increase in your home’s value2.
FHA Loans:
Mortgage Insurance Premium (MIP)
All FHA loans require MIP, regardless of the down payment amount. MIP includes an upfront premium (usually 1.75% of the loan amount) and an annual premium paid monthly12.
Duration
For loans with a down payment of less than 10%, MIP is required for the life of the loan. If the down payment is 10% or more, MIP can be canceled after 11 years2.
VA Loans:
No PMI
VA loans, available to veterans and active-duty service members, do not require PMI. Instead, they have a one-time funding fee, which can be financed into the loan2.
USDA Loans:
Guarantee Fee
USDA loans require an upfront guarantee fee (1% of the loan amount) and an annual fee (0.35% of the loan balance), which is paid monthly2.
How Mortgage Insurance Works:
Protection for Lenders
Mortgage insurance protects the lender, not the borrower. If you default on your loan, the insurance covers a portion of the lender’s loss12.
Cost
The cost of mortgage insurance is typically added to your monthly mortgage payment, but some options allow for upfront payment or a combination of both1.
Understanding these requirements can help you make informed decisions about your mortgage options and manage your homeownership costs effectively.
If you have any more questions or need further details, feel free to ask!