When You Need Mortgage Insurance
If you're putting down less than 20% on a conventional loan, you'll pay for mortgage insurance. This isn't optional — it's a Freddie Mac requirement that protects the lender if you default on your loan.
The requirement kicks in when your loan-to-value ratio exceeds 80%. Say you're buying a $400,000 home with a $350,000 loan. Your LTV is 87.5%, so you need mortgage insurance.
Your lender calculates the LTV by dividing your loan amount by the property value as determined in the appraisal. This value definition matters because it determines whether you need coverage at all.
How Coverage Levels Work
Freddie Mac offers two types of mortgage insurance: standard and custom. The coverage percentage represents how much of your loan balance the insurance company will pay the lender if you default.
Standard coverage ranges from 6% to 35% of your loan amount. The exact percentage depends on your loan-to-value ratio and loan term. A 30-year fixed-rate loan with 90% LTV requires 25% standard coverage. That means on a $300,000 loan, the insurance covers $75,000 of potential loss.
Custom coverage offers lower percentages but costs more upfront. The same 30-year loan at 90% LTV drops to 16% custom coverage, protecting $48,000 instead of $75,000. You pay for this reduction through higher credit fees at closing.
Standard vs Custom Coverage Breakdown
For loans with terms longer than 20 years, standard coverage works like this:
- 80.01% to 85% LTV: 12% coverage
- 85.01% to 90% LTV: 25% coverage
- 90.01% to 95% LTV: 30% coverage
- 95.01% to 97% LTV: 35% coverage
Custom coverage reduces these percentages significantly:
- 80.01% to 85% LTV: 6% coverage
- 85.01% to 90% LTV: 12% coverage
- 90.01% to 95% LTV: 16% coverage
- 95.01% to 97% LTV: 18% coverage
Loans with terms of 20 years or less get better standard coverage rates. The 90.01% to 95% LTV range drops from 30% to 25% coverage, and the highest LTV tier stays at 35%.
When Custom Coverage Makes Sense
Custom mortgage insurance only works with "Accept" mortgages — loans that meet Freddie Mac's automated underwriting approval. You can't get custom coverage on manually underwritten loans.
The trade-off is straightforward: lower insurance coverage in exchange for higher upfront costs. You'll pay additional credit fees that increase your closing costs or interest rate. Your lender can explain the exact cost difference based on your loan details.
You cannot finance the custom mortgage insurance fees into your loan amount. These costs must be paid at closing or absorbed into your interest rate.
Special Rules for New York Properties
New York has different valuation rules that affect when mortgage insurance is required. The state uses the appraised value on your loan's note date to determine if you need coverage, rather than the standard Freddie Mac value definition.
This only applies to the initial requirement decision. Once the lender determines you need mortgage insurance, they switch back to the standard value definition to pick your coverage level.
Say you're buying a co-op in Manhattan. The lender first uses the New York rule to decide if mortgage insurance is required. If it is, they then use the standard Freddie Mac value definition to determine whether you need 25% or 30% coverage.
Approved Insurance Companies
Your mortgage insurance must come from a company on Freddie Mac's approved list. Your lender handles this selection — you don't shop for mortgage insurance companies yourself.
The insurance company issues coverage under a master policy agreement with Freddie Mac. This ensures the coverage meets all requirements and protects Freddie Mac's interests when they purchase your loan.
Once you have coverage with a specific company, you typically stay with that insurer until the insurance cancels. Transfers between companies are rare and must follow specific Freddie Mac procedures.
Required Disclosures and Cancellation Rights
Your lender must provide all disclosures required by the Homeowners Protection Act. These disclosures explain when and how you can cancel your mortgage insurance.
The HPA gives you specific rights to request cancellation when your loan balance drops to 80% of the original property value. You also have the right to automatic cancellation at 78% LTV in most cases.
Your lender must explain these cancellation rights at closing. They'll also provide annual statements showing your current loan balance and the date when you can request cancellation.
What Could Trip You Up
The biggest surprise for many borrowers is the difference between standard and custom coverage costs. Custom coverage looks attractive because of the lower percentages, but the upfront fees can be substantial.
ARM and manufactured home loans face additional restrictions. These loan types max out at 95% LTV, so you can't get the highest coverage tiers that go up to 97% LTV.
Home Possible mortgages have their own coverage schedule that differs from standard conventional loans. The coverage percentages are often lower, especially in the higher LTV ranges.
If you're buying in New York, make sure your lender understands the special valuation rules. Using the wrong value definition could affect your coverage requirements and costs.
References
For the official guidelines, see 4701.1: Mortgage insurance in the Freddie Mac Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Custom mortgage insurance options
Mortgaged Premises located in the State of New York
Credit Fees
Mortgage insurance is required for each conventional Mortgage Freddie Mac purchases that has a loan-to-value (LTV) ratio of more than 80%. The LTV ratio is obtained by dividing the original loan amount by the value, as defined in
Section 4203.1(a)
.
(a)
Freddie Mac's mortgage insurance coverage options
Freddie Mac offers two mortgage insurance coverage options:
Custom mortgage insurance
The standard and custom coverage levels apply as stated in the table below.
Standard and custom mortgage insurance coverage levels
80% and ≤ 85%
85% and ≤ 90%
90% and ≤ 95%
95% and ≤ 97%
6%
12%
25%
35%
16%
18%
1
; and
1
12%
25%
30%
35%
6%
12%
16%
18%
®
6%
12%
25%
25%
16%
18%
Home Possible Mortgages:
1
; and
1
12%
25%
25%
25%
6%
12%
16%
18%
1
Except for Mortgages secured by a CHOICEHome
®
as described in
Section 5703.12
, Manufactured Homes and ARMs are limited to a maximum LTV ratio of 95%.
If custom mortgage insurance is chosen, in addition to all other applicable Credit Fees, the custom mortgage insurance Credit Fee in Price in
Exhibit 19, Credit Fees,
applies, including on Home Possible Mortgages.
(b)
Custom mortgage insurance options
The custom mortgage insurance option provides an alternative to standard mortgage insurance coverage.
Custom mortgage insurance is available only for Accept Mortgages.
Custom mortgage insurance may not be financed as part of the principal amount of the Mortgage.
(c)
Mortgaged Premises located in the State of New York
For Mortgaged Premises located in the State of New York, the “value” is the appraised value of the Mortgaged Premises on the Note Date of the Mortgage and is used solely for the purpose of determining whether mortgage insurance is required or should be canceled. This definition of the “value” of Mortgaged Premises located in the State of New York applies only to the above-stated mortgage insurance requirements and is not applicable for any other purposes under the terms of the Purchase Documents. After determining that mortgage insurance is required, the definition of “value” from
Section 4203.1(a)
should be used for the purposes of selecting the appropriate mortgage insurance coverage level.
Note: For special requirements related to Cooperative Share Loans when the Cooperative Unit is located in the state of New York, see
Section 4701.5
.
(d)
MI master policy and approved insurers
The Mortgage must be insured by an approved private MI or State housing finance agency that is approved to insure Mortgages as of the Delivery Date of the Mortgage (see
Exhibit 10, Freddie Mac-Approved Mortgage Insurers
). The Mortgage must be insured under an approved master policy or loan loss reserve agreement in accordance with
Exhibit 10
. Mortgage insurance coverage must continue to be carried with the MI that insured the Mortgage, except as provided for transfers of mortgage insurance coverage in
Section 8203.5(b)
.
The required mortgage insurance must be in full force and effect as of the Delivery Date and remain in force until canceled in accordance with the requirements of
Sections 8203.2 through 8203.4(c)
or pursuant to applicable law. Mortgage insurance coverage must not be subject to any exclusion besides those exclusions stated in the relevant master policy or loan loss reserve agreement. Coverage must run to the benefit of Freddie Mac for a whole loan or a participation loan insured under a participation policy or to the Seller for any other insured participation loan. No action may have been taken, or no action may have failed to be taken, that would impair the rights of Freddie Mac or the Seller. Participation policies with provisions inconsistent with this section or that impose premium payment or reporting requirements on Freddie Mac are not acceptable.
The Seller warrants that the Borrower has been given all disclosures required by law, including, but not limited to, the Homeowners Protection Act of 1998 (HPA), as amended, relating to the terms on which Borrower-paid mortgage insurance may be canceled. This includes all disclosures required by the HPA at loan origination to describe the Borrower’s mortgage insurance cancelation rights under the HPA.
(e)
Credit Fees
Mortgages sold to Freddie Mac with mortgage insurance coverage lower than the standard levels shown in
Section 4701.1(b)
will be assessed the Custom Mortgage Insurance Option Credit Fee in Price, as described in
Exhibit 19
.
