Jun 22, 2020
You may not need 20% down with a little help from mortgage insurance
Both daunting down payments and loan jargon alphabet soup add a degree of intimidation when it comes to the homebuying process. Potential buyers who don’t quite have 20% down or all the facts on private mortgage insurance (PMI) just yet need not fear, though! Mortgage insurance provides your lender with peace of mind against the risk of default and may allow you to still qualify for a home loan. Here’s what you need to know about mortgage insurance:
What is mortgage insurance?
Per the Consumer Finance Protection Bureau (CFPB), a mortgage insurance policy lowers risk to the lender, allowing buyers the potential to secure loans they might not otherwise qualify for (for example, if they have less than a 20% down payment). The type of loan you choose will determine how and where you’ll pay mortgage insurance. Keep in mind that mortgage insurance of all types function to protect the lender, not the buyer, in the event of a default in payments (missed payments). Also note that your credit score and/or debt to income ratio (DTI) could impact your ability to qualify for a home loan.
Who needs mortgage insurance?
Any borrower whose down payment totals less than 20 percent of the home’s cost may need to budget for mortgage insurance premiums. The added cost of mortgage insurance premiums may be tacked onto each monthly mortgage loan payment, tied into your costs at closing, or both. Consult with your mortgage professional to help determine what might make the most sense for your unique situation.
How do I pay for mortgage insurance?
The loan type you choose will determine how you pay for mortgage insurance.
Borrowers with conventional loans often obtain private mortgage insurance (PMI), through a separate company. Rates will likely vary depending on your financial situation and credit score, but payments are typically monthly, with minimal extra cost required at closing. Once you’ve paid down some of your loan or as your loan has reached a scheduled date, you may also be eligible to cancel your PMI.
Borrowers with a Federal Housing Administration (FHA) loan may obtain mortgage insurance directly through the FHA. The cost generally remains the same regardless of credit score, but could hike a bit if your down payment totals less than 5% of the home’s purchase price. Consider budgeting for added costs upfront, at closing and monthly. If you can’t manage the upfront costs and would prefer a larger overall loan amount instead, you may want to speak with your mortgage professional about the possibility of rolling the fee into your mortgage loan.
Borrowers with a US Department of Agriculture (USDA) loan might also be required to pay PMI monthly and at closing. Fees may be similarly rolled into overall loan amounts, at the price of a larger overall cost.
Borrowers with a Department of Veterans’ Affairs (VA)-backed loan will not pay mortgage insurance in the same way, but may still be required to pay an upfront “funding fee”. Fees are based on type of service, eligibility, down payment amount, disability status and more. Like FHA and USDA loans, borrowers may be able to opt to add the upfront fee to the overall loan amount instead of paying out of pocket.
Whatever loan type and mortgage insurance you choose, remember that policies protect the lender, not the borrower. Missed loan payments can affect your credit score, trigger late fees and more. If you’re having trouble making payments or are falling behind on your mortgage loan, you might want to speak with your mortgage servicer and/or use the CFPB’s “Find a Counselor” tool to locate a housing counselor in your area.