Qualified mortgage insurance (QMI) is associated with the Federal Housing Administration (FHA). It is insurance that protects the lender in case of non-payment of the loan. It is not an insurance that benefits the borrowers, like credit insurance. With credit insurance the borrower pays a premium so that if default comes because of disability, unemployment or death, then the interests of the borrower are protected.
FHA sponsors lenders so that housing is offered to and affordable for a larger number of people than would be offered loans without this backing. Therefore, the FHA sponsors insurance so that the lender who works with the agency and takes a risk will have their interests protected. The borrower is required to pay for the insurance. There are conditions that must be met to avoid payment of QMI. The borrower must put down as much as 20% of the home value before the lender will allow them to not purchase QMI. If default occurs and the borrower has the QMI, the federal government pays the loan amount to the lender. So, unless there is a 20% down payment invested in the property, the lender will be hesitant to allow you to go without the coverage.
Let’s look at the differences between QMI and credit insurance that was mentioned in paragraph one. Both of these type insurance are paid by the borrower through monthly payments added to the mortgage payment. You can make a lump sum payment, but this is very rare. Usually that amount of money would go to the down payment to reduce interest rates and insurance requirements. The difference, as mentioned earlier, is who benefits. Credit insurance benefits the consumer. QMI benefits the lender. Credit insurance would be for someone who believes their life expectancy may be shorter than other similar individuals due to health constraints or being in an occupation that carries a high risk of death. The QMI is insurance that is similar to non-FHA backed loan requirements known as Private Mortgage Insurance or PMI. Both of these benefit the lender. When you are discussing your mortgage with your lender, be sure to ask for and also receive a full explanation of what insurance is provided, required, or the length of time you will have to pay the premium.
The QMI premiums will be required as long as the borrower does not have enough equity in the home to remove the requirements of coverage. This is set by the federal government as conditions for backing the note. When the borrower has paid 20% into the home or the home has increased in value to equal 20% equity, then the borrower can ask to be relieved of the insurance requirement. Again, the government backed loan requires an 80% loan-to-value ratio.
Even though the borrower does not benefit from the insurance, there are benefits to lender and the public. The QMI is a way that the risk of loans is lower. By insisting that the borrower pay a premium for insurance, mortgage debt is impacted. The more risk the lender is taking on the note, the higher the insurance premium will be. Thus, a borrower will be more likely to consider the risk of buying a home that will be difficult to make payments on.
Because of the recent impact of mortgages on the financial market in the United States, it is not hard to believe that mortgage insurance premiums will be required on all loans, not just those backed by the government. Not only a stricter requirement for coverage, but also a greater amount of investment in the property equity can be an outcome of the crisis.