Mortgage insurance can make funds more accessible, even at high loan amounts
Traditionally, Americans who are searching for their first home are told to save up a down payment equal to 20% of the purchase price of any property they buy. This gives them a healthy amount of equity in their home, making financing accessible and affordable when pursuing a mortgage. But not everyone can afford to save up that much for a down payment. This is where mortgage insurance can play a massive role: it protects lenders, allowing borrowers to qualify for financing at a higher loan to value.
What is Mortgage Insurance?
Mortgage insurance is exactly what it sounds like: insurance for a mortgage. However, it is unique in one way: the person paying for the insurance premium, the borrower, is not protected by the insurance. Instead, mortgage insurance protects the lender. In the event that a borrower defaults on their mortgage – leaving the lender on the hook for the outstanding loan amount – the insurance company will pay the lender an amount equal to the balance of the mortgage.
Mortgage insurance premiums traditionally amount to 0.5%-1% of the loan’s balance per year, though they can be as low as 0.25% and as high as 2%. In the event that your mortgage’s loan to value falls to 78% or lower, the lender must legally cancel the requirement for mortgage insurance as according to the Homeowners Protection Act.
Why Would I Ever Want Mortgage Insurance?
Mortgage insurance makes financing accessible to borrowers that can’t save up for a full 20% down payment. When any lender offers a loan to a homeowner, they are taking on some amount of risk. If the borrower defaults on the mortgage and the house goes into foreclosure, the lender will then have to sell the subject property to recoup their losses – often at a loss. Because of this, lenders have strict lending requirements for borrowers, which makes it difficult for some Americans to qualify for loans. Lenders are hesitant to offer loans to borrowers with down payments less than 20% of a property’s purchase price, as the lower the homeowner’s equity, the higher the risk. By having mortgage insurance, borrowers are able to qualify for mortgages with as little as 3% down*, depending on what programs they qualify for. This allows Americans from all backgrounds to more easily become homeowners, without the barrier that a full 20% down payment presents.
Becoming a homeowner is a dream for so many Americans, but balancing paying rent and saving for a 20% down payment can be nearly impossible, depending on an individual’s circumstances. By allowing borrowers to qualify for loans with low down payments, mortgage insurance saves potential homeowners thousands of dollars in renting. If you’re curious about what kind of loan you can qualify for with a low down payment, reach out to us. We’ll help map out your specific path to homeownership.
*Down payment requirements will vary on an individual basis and OAC