Americans who have a down payment of around 20 percent or less may have to get mortgage insurance to qualify for the loan. However, some lenders do not explain what this is, and some borrowers walk away because they don't believe they should buy mortgage insurance.
Mortgage insurance provides lenders with a guarantee if the borrower defaults. It was introduced to allow those who did not have the standard 20 percent down payment in cash but still wanted to buy a home. Lenders wanted the security of knowing that if the borrower defaulted, they would at least have 20 percent of the mortgage.
There are two types of mortgage insurance available:
- Private mortgage insurance (PMI) for conventional mortgages covers any loan not guaranteed or insured by a government agency. With this insurance, homeowners may be able to pay as little as 3 percent as a down payment.
- FHA mortgage insurance premiums (MIP), which is necessary for anyone purchasing a home through the FHA loan program. These mortgages may be available with as little as 3.5 percent down, which is why they require mortgage insurance.
Mortgage insurance cost varies, depending on how much the borrower makes as a down payment, whether the mortgage is a 15-year or a 30-year note, the borrower's credit score and other qualifications, and the type of mortgage (FHA or conventional).