Mortgage insurance is an insurance product that is paid for by the borrower for the benefit of the lender. If you default on your loan, stop making your mortgage payments, then the insurance will pay the lender. The lender will require you to carry this insurance is you do not invest enough in the down payment when you purchase your home. The general requirement is for an investment of 20% down so that you are not financing more than 80% of the value of your home. Lenders don’t allow the borrower to finance the premium by including it in the total amount financed. There are not many exceptions. If you want to roll the premium into the loan, check with your lender for the qualifications. You will be expected to have the premium when you close on the loan. This can be quite a bit of money for the prospective buyer to come up with.
There are private and government sponsored mortgage insurances. Depending on the loan that you apply for and are qualified for will depend on which insurance you are eligible for. Let’s start with government backed loans. These are loans made by the Federal Housing Authority (FHA) and the Veteran’s Administration (VA). Most people who are eligible for these loans will not be expected to make a large down payment. FHA was created to sponsor lower income persons who would not have the higher down payment or even the credit score to qualify for a traditional loan. Thus, the FHA will guarantee the notes of those who qualify and use the FHA for a loan.
With the FHA you will have insurance similar to the traditional PMI that other loans have, with the monthly payments built into the mortgage payment. However, you will be expected to bring the first year annual premium to the table at close of the loan. You will not be allowed to add this expense to your home loan total. Then you will be required to make monthly payments for the insurance that goes to the annual fee for the mortgage insurance backed by the FHA. You may be able to negotiate with the seller and see if they are willing to make the first year annual premium payment or even part of it at the time of closing.
Veteran’s Administration (VA) loans are similar to FHA loans in that the government backs the mortgage loans and the refinance loans. The VA loans are restricted to borrowers that have some type of military history. They must be active members or past members of one of the branches of the Armed Forces. The VA loans are like FHA in most aspects except the roll over at closing. The VA will allow you to roll over, or include, the premium for the mortgage insurance in the total finance amount of your home. The upfront payment at closing is still required with the roll over. Keep in mind that if you choose to roll over the premium you will pay a lot more over time. You will be paying interest on the insurance premium by including it in the loan amount, which could add up to a substantial amount over the length of the note. You will be able to bring less cash to the table at close but you will pay more in the long run.
Private Mortgage Insurance (PMI) is the companion to government sponsored mortgage insurance but it is privately held and not backed by the federal government. Lenders will require this insurance if you don’t have the requisite down payment for the property. PMI is paid monthly as a part of your mortgage payment. Even if you choose annual payments, you will pay a prorated amount that the lender holds in escrow until the payment is due. You will have no upfront payment required at close and you will not roll over the premium amount into the loan amount you finance. You will make a monthly payment to your lender that will be allocated into payments to reduce principal, payment on the interest, payments toward the escrow for property taxes, payments toward the escrow for hazard insurance, and finally the premium payment that will go toward your PMI.