8. Home Loan Mortgage Insurance and Private Mortgage Insurance

Q: What is mortgage insurance?

Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. PMI stands for Private Mortgage Insurance or Insurer. It is often required on loans where the borrower makes a down payment of less than 20%.

Q: How does mortgage insurance work? Is it like home or auto insurance?

Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. Even though the homebuyer pays for it, mortgage insurance does not protect the borrower. Instead it protects the lender. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit. Ask your lender for details and visit the FTC's website for more information.

Q: Do I need mortgage insurance? How do I get it?

You may need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. You cannot shop for mortgage insurance. Instead, the lender will pass the premium on to you.

Lender Rate Match Tip: On conventional loans (as opposed to FHA loans) the amount of the monthly mortgage insurance premium may be based on your credit score. It's still another reason to review your credit reports and scores before you start the mortgage process. The only source to order your three-bureau FICO scores is myFICO.com.

Q: How can I receive a discount on the FHA initial mortgage insurance premium?

Ask your real estate agent or lender for information on the HELP program from the FHA. HELP - Homebuyer Education Learning Program - is structured to help people like you begin the home buying process. It covers such topics as budgeting, finding a home, getting a loan, and home maintenance. In most cases, completion of this program may entitle you to a reduction in the initial FHA mortgage insurance premium from 2.25% to 1.75% of the purchase price of your new home.