Mortgage Insurance – What is it and When is it Required

Mortgage Insurance insures the lender from loss, if the borrower is unable to pay back their mortgage. It is required on loans that are more than 80% of the property’s purchase price and vary significantly between conventional loans and government insured loans. Buyers obtaining conventional loans with less than 20% down will be required to obtain a Private Mortgage Insurance (PMI). PMI is added to the monthly payment. The annual cost can range from .3% to 1.20% of the loan amount depending upon the amount of down payment.

Federal Housing and Urban Development (HUD) insures Federal Housing Association (FHA) loans through a required upfront mortgage insurance premium (UFMIP) and a monthly mortgage insurance premium (MIP). The UFMIP is normally financed into the loan and equal to 1.75% of the loan amount. MIP varies depending upon the amount of down payment and ranges from .45% annually on the 90% 15 year term mortgage to 1.35% annually on a 95% 30 year term loan.

You may wonder why someone would obtain an FHA insured loan versus a conventional loan since the cost on government insured loans is more expensive. The answer is FHA loan qualification ratios are more lenient allowing a buyer to qualify for a loan that they would not otherwise qualify. See our post on Determining Your Maximum Purchasing Power which discusses the different ratios used in conventional and FHA insured loans.

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