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Chrisman's Corner: Is Mortgage Insurance Necessary?

JMAC’s brokers know exactly what mortgage insurance is. But how do they explain it to their clients? What exactly is mortgage insurance? 

Our experienced brokers tell their borrowers that MI is a form of insurance which essentially protects the lender – like JMAC - if a loan goes into default and foreclosure. For conventional or conforming mortgages, PMI (private mortgage insurance - obtained from an independent PMI company) is required on all mortgages that have a loan-to-value (LTV) greater than 80% of the property value. As a quick example, if the value of the client’s home is $400,000 and their mortgage is greater than $320,000, the borrower will be required to have mortgage insurance. 

Brokers know that PMI premiums vary depending on the loan to value of the mortgage, type of mortgage and borrowers' credit scores. The higher the LTV, the lower the borrower’s equity or down payment on a purchase, the higher the coverage required by the lender thus increasing the mortgage insurance cost. For example, if a mortgage is covered by PMI with 25% coverage and the mortgage goes into default, the PMI Company will pay the lender up to 25% of the mortgage amount to cover costs and losses due to the foreclosure. Requirement of PMI is for all conforming mortgages, regardless of refinance or purchase, condo or single family detached home.

Many of JMAC’s brokers also do FHA mortgages. In this program the full amount of the mortgage is covered and require two forms of insurance premium be paid: an upfront premium that is added to the loan amount and a monthly mortgage premium.  Recently FHA changed its guidelines so all new FHA mortgages require the monthly premium be paid for the life of the loan. Keep in mind the minimum down payment for FHA is 3.5% for the maximum loan amount of $625,500. FHA mortgage premiums are collected by the federal Department of Housing and Urban Development--it is a government insured mortgage.
 
And our brokers know that veterans obtaining a VA mortgage also have a version of mortgage insurance, called a "funding fee" that is added to the mortgage amount. The mortgage insurance industry, in spite of only insuring 10-15% of mortgage volume, is very good at answering questions and in training – ask your JMAC AE for information if you need it!