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Simply put, mortgage insurance protects the mortgage company
against financial loss if a homeowner stops making mortgage payments. Mortgage
companies usually require insurance on low down payment loans for protection in
the event that the homeowner fails to make his or her payments. When a homeowner
fails to make the mortgage payments, a default occurs and the home goes into
foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure.
The homeowner loses the house and all of the money put into it. The mortgage
insurer will then have to pay the mortgage company's claim on the defaulted
loan.
For this reason, it is crucial that the family buying the home can
really afford it, not only at the time it is purchased, but throughout the time
period of the loan.
Although the cost of the mortgage insurance is paid by the home
buyer, or borrower, the mortgage insurer works directly with the mortgage
company. Mortgage insurance is available to commercial banks, savings &
loans and mortgage bankers, all of whom offer mortgage loans to home buyers.
Remember that mortgage insurance is not the same as credit life
insurance, also called mortgage life insurance. This type of policy repays an
outstanding mortgage balance upon the death of the person who took out the
insurance policy.
The
Secondary Market
The mortgage company's decision to use mortgage insurance is driven
by the requirements of investors in the mortgage market. Because of the losses
that could occur, major investors require mortgage insurance on all loans made
with low down payments.
The three primary investors in home loans are Federal National
Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation
(Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By
purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help
keep money available for homes across the country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy
mortgages. It adds the guarantee of the full faith and credit of the U.S.
Government to mortgage securities issued by mortgage companies.
The
Two Choices: Government Insurance and Private Insurance
Now that we have explained how mortgage insurance works and why it
is necessary, let's look at the basic kinds of mortgage insurance. Low down
payment mortgages can be insured in two ways -- through the government or
through the private sector. Mortgages backed by the government are insured by
the Federal Housing Administration (FHA), the Department of Veterans Affairs
(VA) or the Farmers Home Administration (FmHA).
Although anyone can apply for FHA insurance, the other two
government mortgage guarantee programs are much more targeted. The VA program is
limited to qualified, eligible veterans and reservists. This program is very
specialized, so contact your mortgage professional for the details. The FmHA
insures loans for the construction and purchase of homes in rural communities.
Obtaining conventional financing is the alternative to obtaining a
home loan backed by the government. Conventional mortgages are all home loans
not guaranteed by the government, including those guaranteed by private mortgage
insurers.
Although government and private insurance are based on the same
concept of allowing families to get into homes with less cash down, there are
many differences between the two. Often, your mortgage professional will play an
important role in suggesting and deciding which insurance is selected.
Home buyers must make a down payment of at least 5% of a home's
value to be considered for private mortgage insurance. However, under some
special programs, the down payment requirement allows the buyer to use a gift or
grant to cover 2% of the 5% down payment required by private mortgage insurers.
The gift or grant may come from a friend, relative, community group or other
organization.
Private mortgage insurance is available on a wide variety of home
loans and there is no pre-set limit on the loan amount. Although differences
such as these may affect whether the mortgage company prefers to work with
government or conventional mortgages, your mortgage professional will discuss
which one would be better for your situation.
With the wide variety of loans available, home buyers have the
freedom to choose the type of loan that best suits their needs. Early on in the
home buying process, it is a good idea to meet with several companies to compare
the types of mortgages they offer and shop for the best price and terms. Best of
all, working with a mortgage insurer can be very easy, whether your loan is
insured by the FHA or a private mortgage insurance company, because your
mortgage professional handles all of the arrangements.
By making lending
money to home buyers safer, mortgage insurance helps more families get into
homes of their own. |
