A One Minute Tutorial on the What and Why of Mortgage Insurance
Many borrowers ask us at DiVita Home Finance, “What is mortgage insurance and why do some loans require it and some do not?”
Mortgage insurance is required on all low down payment loans. It insures the lender in the event of default. It is not required for loans where the borrower puts down 20% of the purchase price. But in today’s loan markets, many conventional loans are available with only 3% down and FHA loans ask as little as 3.5%.
On a $400,000 home, a 20% down payment = $80,000, whereas 3% = $12,000. If things go south, it’s a lot easier to walk away from 20K rather than 80K. Therefore, lenders, infinitely ahead of the curve, require the protection of mortgage insurance on low down (high risk) loans. We let our borrowers know mortgage insurance is an inherent cost for low down payment loans which is payable upfront or in monthly installments. But it’s a great way for someone to get into their first starter property with a relatively low down payment (and 100% of this could be a gift from a relative!).
We hope our answer helps you to reply to your clients, too. Educating a renter about low down payment options sometimes turns them into buyers!
