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Mortgage Insurance

DEFINITION

Requirement of a lender when the borrowing party has minimal equity, typically only 20 percent, to ensure in the event the borrower defaults the lender’s money is protected.

EXPLANATION

When a borrower puts 20 or less percent towards the down payment of their home purchase they will be required to purchase mortgage insurance. Mortgage insurance protects lender’s in the event the borrower defaults on their mortgage debt. Because lender’s typically sell the property’s they seize through foreclosure, mortgage insurance ensures the lender does not lose money or have the ability to recoup less than its true value.

When Private Mortgage Insurance is Required

Private mortgage insurance must be purchased by borrowers who have loan to value ratios of over 80%. Once the borrower’s debt is paid down to the point where the LTV is below 80%, borrowers can cancel the private mortgage insurance. Loan to value ratio is the loan amount of a property divided by the property’s value.

Although lenders typically do not approve borrowers with LTV’s of higher than 80%, there are  government loan programs, including FHA or VA loans, that extend credit to borrowers with a maximum LTV of 97%. Such programs are created for those who do not have a larger down payment amount. If the borrower has a LTV of higher than 80 %, he or she will be required to purchase mortgage insurance.

Mortgage insurance premium is a monthly premium payment paid by a borrower to a private mortgage company. The premium can be deducted from a borrower’s expenses.

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