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Who needs mortgage insurance?

 

Almost all borrowers who have less than a 20 percent down payment or equity stake will be required to have an MI policy in place as a condition of funding their mortgage.

That’s always the case with conforming loans; Fannie Mae and Freddie Mac won’t buy or guarantee higher loan-to-value loans without a policy in place. For other loans, those not sold to Fannie or Freddie, lenders are free to require policies for loans with smaller (or even larger) down payments, depending upon how much risk they are interested in taking. 

For loans directly backed by the government, such as FHA loans, all borrowers must pay into a self-insuring mortgage insurance pool. For others, such as VA or USDA-backed loans, the government covers the risks of default, so MI policies are not required. 

Why do I have mortgage insurance?

Simply put, you’re a risk. Lending mortgage money to borrowers has always carried risk to the lender, and borrowers with less of an interest in their property – less of a down payment or equity stake – have little to lose if times become difficult. The less “skin in the game” a borrower has, the larger the risk they are to the lender.

During the housing boom of the early and mid-2000s, many loans were written without traditional mortgage insurance, and when the economy turned sour and home prices dropped, many borrowers stopped making payments on their loans or walked away from their homes altogether, leaving massive losses to lenders in their wake. As a result, many banks stopped making lower down payment loans without MI.

‘Tight underwriting standards’ and mortgage insurance

If you’re in the market for a mortgage, have refinanced or are just an interested observer, you’ve probably experienced or heard about rigid or “tight” underwriting standards for new mortgage loans, especially the need for a higher down payment to buy a home (or deeper equity stake to refinance one).

As noted above, lenders stopped making loans with low down payments, but mostly for one simple reason: they could not get MI policies for them. In the real estate downturn, mortgage insurers had a rough time of it and were also stung by losses, and with home prices still sliding in many areas, many mortgage insurers simply stopped writing policies for loans with less than 10 percent down – and wouldn’t write policies at all in some markets or for some kinds of homes.

As the housing market gradually improved, so has the availability of MI for loans with smaller down payments. That’s a good thing, since it’s a virtual certainty that your lender will require that you get a policy to protect his interests when you ask for a mortgage, unless you can come up with a 20 percent stake.

How do I get a mortgage insurance policy?

Although several companies offer private mortgage insurance, you can't shop around to get the best price; in many states, premium costs are set by regulation. This being the case, your lender will use a company with whom they have a relationship or one which will cover your financial profile and choice of loan. Once the policy is approved, you'll typically make premium payments each month as part of your mortgage payment, although other payment methods may be offered.

Even though borrowers are more aware of MI today, many may not realize they even have it because they never see a policy; even any mention of it is buried in the blizzard of paperwork they sign at closing. And because the MI premium may not be broken out separately on their mortgage statement, they may not know the policy exists unless they carefully review their mortgage contract.