Some people have plenty of money for a down payment. For those that don’t, there’s mortgage insurance. If you have already determined that you can’t afford a standard down payment on a home (usually 20% for conventional loans) but you still want to buy, don’t worry. Mortgage insurance exists to help make you a more attractive candidate to lenders.
What is Mortgage Insurance?
Mortgage insurance protects the lender in the event the borrower defaults on the loan. Defaults include failure to make payments because of death, medical bills and job loss. Mortgage insurance can be provided by a private mortgage insurance company (PMI) or by a government agency such as FHA or VA. As a borrower of the loan, you pay the premiums and the lender is the beneficiary.
PMI Insurance with Conventional Loans
Typically, borrowers making a conventional loan down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance may allow you to qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in the total monthly payment that you make to your lender, your costs at closing, or both.
Private mortgage insurance premium rates vary based on the loan-to-value ratio on the home, your credit score and whether your mortgage is fixed-rate or variable-rate. The better your credit, the lower your PMI payments will be. The more money you use as a down payment, the less you have to borrow and the more favorable this ratio is in the view of the lender.