Hi! Evan Swanson here to talk to you today about mortgage insurance. What is mortgage insurance, when is it required, and why do banks require it?
First, what is mortgage insurance? Mortgage insurance is insurance that homeowners pay for, and the bank is the beneficiary to the insurance coverage. It protects the bank against losses they would incur in the event of default or foreclosure on the mortgage they make.
When is mortgage insurance required? On conventional loans, mortgage companies typically require mortgage insurance whenever there’s less than 20% down. On FHA loans mortgage insurance is required regardless of down payment.
Why do banks require mortgage insurance? To answer that question we have to go back and look at what banks required prior to mortgage insurance. Banks required that everybody have 20% down and the idea was in the event of a foreclosure the bank would have incurred losses and that means they would have missed out on mortgage payments for somewhere between six and 18 months, meaning missed interest income.
If a person can’t afford to make their mortgage payments chances are they can’t afford to maintain the property so once they get the house back via the foreclosure process there’s deferred maintenance the bank has to pay for. The bank would have had to hire an attorney to execute the foreclosure process and then hire a realtor and pay a commission in order to sell the house. The banks require 20% down as their cushion to ensure that if they had to go through that foreclosure process they can still get their loan proceeds back.
Now there are a variety of ways to pay for mortgage insurance but without 20% down banks are going to require it.
If you’re curious about the different mortgage insurance options available to you and want to learn about them I’d love to be your resource for you. Please contact me today. Thank you.