What Is Mortgage Insurance And When Is It Required?

Homebuyers may sometimes find it hard to set aside funds for an adequate down payment on the property. But this should not preclude every homebuyer from the opportunity to own a home. And this is where mortgage insurance comes in. It works as a financial safety net for the lender, who can provide a loan even when the buyer is in a position to make only a smaller amount of down payment.

When the down payment is under 20%, the lender will usually require mortgage insurance to protect their interests. In this case, if the borrower defaults on loan payments and goes into foreclosure, the mortgage insurance coverage will work as financial security for the lender.

When is Mortgage Insurance Required for Different Loans?

A number of loan programs are available which allow lower down payment if the borrower is willing to pay for mortgage insurance.

Conventional Loans

Private insurance providers offer PMI or private mortgage insurance for conventional loans. Whether you are buying a new home or refinancing an existing mortgage with a conventional loan, you will generally require PMI if your down payment or home equity is below 20%.

FHA Loans

If you are seeking a Federal Housing Administration (FHA) loan, you will be required to pay MIP or mortgage insurance premium, no matter how much of a down payment you are willing to make. Irrespective of your credit score, the MIP rate will remain the same. However, if your down payment amount is below 5%, the MIP cost may be slightly higher.

USDA Loans

USDA Rural Housing loans do not require any down payment to be made. Therefore, it is mandatory for the homebuyer to purchase mortgage insurance to cover the lender’s risk. The insurance is mandatory even when you make a down payment, irrespective of its size.

VA Loans

Department of Veterans’ Affairs (VA) sponsored home loans do not require you to make any down payment. Also, no monthly payments for mortgage insurance are required to be made. However, eligible borrowers using a VA loan are typically required to pay a funding fee upfront.