When you think of paying for insurance in the context of buying a home, you might think of Homeowner’s Insurance. However, a different kind of insurance is also at play.
Mortgage Insurance is a tool that protects lenders. It may seem a bit odd at face value, but it’s a fantastic thing that allows you to maximize your buying power and achieve your goal of homeownership sooner than you may have thought.
When you get a mortgage loan to purchase a home, there is typically a down payment involved. And when a lender gives a mortgage loan, this down payment is essential to them.
The chance that someone will stop making mortgage payments presents a level of risk to a mortgage lender. Based on existing mortgage data, the more down payment a homebuyer gives, the less likely they are to stop making their mortgage payment.
When lenders look at this risk, there’s something of a magic number they come to. When a homebuyer makes at least a 20 percent down payment, it’s viewed as an “acceptable risk.” At this point, you can get pretty much any loan you want.
But what about people who can’t come up with 20 percent down?
That’s where Mortgage Insurance saves the day.
For this reason, Mortgage Insurance is required for all Conventional loans with a down payment of less than 20%. The insurance protects the lender against loss, just in case something unexpected happens. In return, you get a loan with far less money down than would otherwise be required.
This rule is not specific to Conventional loans, either. Government-backed loans, like FHA and VA mortgages, have this same calculation baked into the package. All FHA loans have mortgage insurance requirements, regardless of LTV. They refer to it as a “mortgage insurance premium” (MIP). VA loans do the same thing, but they call it a “guarantee fee.”
It’s all part of the same risk reduction strategy that gives buyers access to loans with as little money out of pocket as possible.
Many people can’t, or don’t want to, put 20 percent down. That can add up to a lot of money! But just because that means higher risk to a mortgage lender does not mean it should keep you from reaping the benefits of homeownership.
When you pay Mortgage Insurance, you can buy a home with as little as 3% down – sometimes even less.
