Mortgage Insurance: Everything you need to know



mortgage-insurance

 

Mortgage insurance (also referred to as a mortgage guarantee) is insurance coverage which compensates lenders as well as investors for losses as a result of default of a home loan. Mortgage insurance can be either public or private based upon the insurer.

 

 

For instance, suppose Mr Manley decides to purchase a house which costs $200, 000. He will pay 10% ($20,000) down payment and takes out a new $180,000 ($200, 000-$20, 000) mortgage on the remaining 90%. Lenders will most likely require mortgage insurance for home loans which exceed 80% (the typical cut-off) of the property’s sale price. On account of his limited equity, the bank requires that Mr Manley purchase mortgage insurance that protects the bank against his possible default. The lending company then requires the mortgage insurer to provide insurance coverage at, as an example, 25% of the $180, 000 ($45,000), leaving the lending company with an exposure connected with $135,000. The mortgage insurer will charge a premium for this coverage, that could be paid by either the borrower or the lender. If the borrower defaults and also the property is sold at a loss, the insurer will cover the primary $45,000 of losses. Coverages offered by mortgage insurers can differ from 20% to 50% as well as higher.

 

mortgage-insirance-calculatorTo obtain public mortgage insurance through the Federal Housing Administration in the United States, Mr Manley must pay the upfront mortgage insurance premium (UFMIP) equal to 1. 75 percent of the loan amount at closing. This premium is normally financed from the lender and paid to FHA on the borrower’s behalf. Depending on the loan-to-value ratio, there might be a monthly premium as well. The United States Veterans Administration also provides insurance on mortgages.

 

Private mortgage insurance

Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 0.5% to 6% of the principal of the loan per year based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score.The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums).

Borrower-paid private mortgage insurance

BPMI or “Traditional Mortgage Insurance” is a default insurance on mortgages provided by private insurance agencies and paid for by borrowers. BPMI allows borrowers to have a mortgage without needing to provide 20% down payment, by covering the lending company for the added risk of a high loan-to-value (LTV) house loan. The US Homeowners Protection Act of 1998 allows borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act calls for cancellation of borrower-paid mortgage insurance whenever a certain date can be reached. This date is when the loan is scheduled to arrive at 78% of an original appraised value or sales price can be reached, whichever can be less, based within the original amortization plan for fixed-rate loans and also the current amortization plan for adjustable-rate mortgage loans. BPMI can, beneath certain circumstances, be cancelled earlier by the servicer ordering a whole new appraisal showing how the loan balance is lower than 80% of the home’s value as a result of appreciation. This generally requires at least two years of on-time payments. Each investor’s LTV requirements for PMI cancellation differ based on the age of the loan and current or original occupancy of the home. While the Act applies only to single family primary residences at closing, the investors Fannie Mae and Freddie Mac allow mortgage servicers to follow the same rules for secondary residences. Investment properties typically require lower LTVs.

Lender-paid private mortgage insurance

LPMI is similar to BPMI except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan.

Contracts

As with other insurance, an insurance policy is part of the insurance transaction. In mortgage insurance, a master policy issued to a bank or other mortgage-holding entity (the policyholder) lays out the terms and conditions of the coverage under insurance certificates. The certificates document the particular characteristics and conditions of each individual loan. The master policy includes various conditions including exclusions (conditions for denying coverage), conditions for notification of loans in default, and claims settlement. The contractual provisions in the master policy have received increased scrutiny since the subprime mortgage crisis in the United States. Master policies generally require timely notice of default include provisions on monthly reports, time to file suit limitations, arbitration agreements, and exclusions for negligence, misrepresentation, and other conditions such as pre-existing environmental contaminants. The exclusions sometimes have “incontestability provisions” which limit the ability of the mortgage insurer to deny coverage for misrepresentations attributed to the policyholder if 12 consecutive payments are made, although these incontestability provisions generally don’t apply to outright fraud.

Coverage can be rescinded if misrepresentation or fraud exists.

History

Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904. The industry grew in response to the 1920s real estate bubble and was “entirely bankrupted” after the Great Depression. The bankruptcy was related to the industry’s involvement in “mortgage pools”, an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran’s Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered. This was followed by a California law in 1961 which would become the standard for other states’ mortgage insurance laws. Eventually the National Association of Insurance Commissioners created a model law.