Mortgage insurance is a type of insurance policy that protects the lender or titleholder in case the borrower defaults on their mortgage payments or is, for some reason, unable to meet their contractual obligations. Mortgage insurance is primarily for the lender’s benefit, but since it lowers their risk, it also means that it allows you to qualify for a bigger loan.
This type of insurance is usually required if you want to borrow money to buy a home with a down payment of less than 20% of the purchasing price. It’s also typically required for FHA (Federal Housing Administration) and USDA (U.S. Department of Agriculture) loans.
Some types of mortgage insurance include private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance and mortgage title insurance.
Mortgage insurance shouldn’t be confused with mortgage life insurance. It sounds similar, but the purpose of mortgage life insurance is to protect the heirs if the borrower dies before they finished paying off their mortgage. Depending on the terms agreed upon, a mortgage life insurance policy will pay off the heirs or the lender.
How Mortgage Insurance Works
As we mentioned above, the original goal of a mortgage insurance policy was to make it easier for people to become homeowners by lowering the down payment. To motivate lenders to approve loan applications, this policy lowers their risk.
Of course, a mortgage insurance policy also increases the size of your loan and will typically be included in your monthly payments. Premiums depend on the type of mortgage, size of the down payment, and amount of coverage. To get the best price, you can find online platforms that allow you to compare mortgage insurance quotes as well as commercial mortgage insurance quotes. If your lender requires you to get mortgage insurance because of the 80% loan-to-value ratio rule, you can request that the policy be canceled once you’ve paid off 20% of the principal balance.
Private Mortgage Insurance (PMI)
Your lender can require private mortgage insurance as part of the terms of your mortgage loan, and they can also arrange for the loan through private insurance companies.
Qualified Mortgage Insurance Premium (MIP)
When you get an FHA or USDA loan, you’ll usually be expected to get a qualified mortgage insurance premium. This offers a similar coverage but has different rules.
Mortgage Title Insurance
Mortgage title insurance is a type of policy that protects the beneficiary against financial loss in case a sale is nullified because of problems with the title. Problems with the title would mean that it’s later determined that someone other than the seller was the owner of the property at the time of the sale.
A title company employee or a lawyer has to perform a title search before mortgage closing. The goal is to see if there are any liens on the property which could preclude the owner from selling. Furthermore, it checks if a property being sold really belongs to the seller. Despite this verification process, if the information is not centralized, it’s possible to fail in uncovering important documents.
Mortgage Protection Life Insurance
If your application for a mortgage had been approved and you’re in the process of filling out the paperwork, it’s not unusual to be offered mortgage protection life insurance. You can refuse this policy, but your lender may require you to sign waivers showing that you understand the risks involved.