Most people that come into my office usually have heard of PMI but usually don’t know what it is. Mortgage insurance (MI) is an insurance policy taken out that protects the lender in case the borrowers default on the home. Typically, when a borrower defaults, there is a gap between what is owed and the funds the lender is able to recoup when the home is sold as a foreclosure. The lender is reasonably assured that since the borrower could not make their house payment, they probably can’t afford to pay the remaining balance of their mortgage. This is where mortgage insurance kicks in. It pays the remaining balance of the mortgage on behalf of the borrower. Let’s say for example that you owed $100,000 on a home when it went into foreclosure. When the lender sells off the home, let’s say they can only get $80,000 for the home, leaving a $20,000 gap. Mortgage insurance pays the $20,000 gap. Who provides mortgage insurance? It depends on the kind of loan that you have. If you have a conventional loan, mortgage insurance is provided by a private mortgage insurance company (usually called PMI). If you loan is an FHA loan, then the mortgage insurance is provided by the Department of HUD. If the loan is a VA, then the mortgage insurance is provided by the Veterans Administration. The type of loan is actually determined by who provides the mortgage insurance.

Lenders require mortgage insurance on any loan where the down payment is less than 20%. Mortgage insurance companies also have their own set of guidelines regarding credit, loan to value, property types, etc. A borrower must meet both the loan guidelines and the mortgage insurance guidelines.

All in all, mortgage insurance is a good thing. Most borrowers do not have a 20% down payment and it allows many people the opportunity of home ownership that otherwise would not be available.

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