Mortgage Insurance is necessary if you buy a home and put less than 20% of the purchase price into the down payment. Banks believe that if you don’t have a lot of money into the home purchase, you may be more at risk for default on your mortgage. This makes your loan riskier for them. To decrease the risk to them, they ask you to buy insurance for them. Just as there are large companies that sell car insurance and life insurance, there are 4-5 national companies that sell mortgage insurance. You pay a monthly premium which is included in your monthly house payment. This pays for the policy. If you default on your mortgage (stop making payments and go into foreclosure), the bank will be reimbursed for their losses by the insurance company.
Mortgage insurance companies can play a part in your loan approval. They have criteria for credit and employment that must be met. The bank knows their criteria. If your loan doesn’t meet these criteria and it is not insurable, the bank will not give you the loan. It is simply too risky for them.
Mortgage insurance premiums can vary according to your credit history. If you have good credit, your premium may be lower. If you have less good credit, your premium may be higher. When you are borrowing your mortgage money, make sure you know the rate your mortgage insurance company is charging you as it will affect the size of your house payment.
For more detailed information, come to our FREE NO OBLIGATION FIRST TIME HOMEBUYER class or wait for future blogs. “Simple answers to home ownership questions”.