Homeowner’s insurance is a policy that is purchased to cover damages that can occur to the home by flood, fire, storm, or other casualty. Mortgage insurance is a policy that the borrower will take out to insure the lender is paid the balance of the mortgage if the buyer defaults on the loan. The homeowner is protected by the homeowner’s insurance and the lender is protected by the mortgage insurance. The reason there is not a benefit to the borrower for the mortgage insurance is because the home owners has usually lost his home through foreclosure due to non payment when the mortgage insurance proceeds are paid to the lender. Not always, but this is usually the case.
Most lenders will require the home owner to purchase the mortgage insurance when the owner does not invest at least 20% of the value of the property in a down payment. The mortgage insurance is also required when the borrower is evaluated as a riskier client due to a lower credit score or credit history. The mortgage insurance does not always have to be carried for the full term of the loan. There are conditions that the buyer meets that will allow the coverage to be dropped.
If the borrower achieves 20% equity in the home through payments, remodeling that increased the value of the home, or through appreciation he can ask that the coverage cease. The lender will most likely ask for an appraisal of the home to verify the increase. Likewise, the lender can ask for an appraisal of the home after the buyer claims 20% equity in the payment if the lender has reason to believe that the home has decreased in value. The federal government has written rules that govern this insurance and part of the rules have a requirement that the lender remove the insurance automatically when the buyer has invested 77% to 78% equity in the home.
If the borrower has a poor payment history as evidenced by late payments in the last year that were more than 30 days late, payments in the prior two years that exceeded 60 days late, or is not current on the mortgage at the time of achieving the equity and submitting the request for removal of the insurance the lender can legally deny the request. However, even with a poor credit history the insurance can be dropped at 50% equity in the home, but the loan payments must be current at the time of the removal of the insurance.