Mortgage insurance : For Those Long on Income and Short on Cash

Mortgage insurance can influence not only the borrower’s house payment but also his ability to qualify. Earlier we briefly discussed the fact that any loan with less than 20% down will require mortgage insurance. Now we need to understand exactly how it affects our loan and our ability to get it.

Many borrowers confuse mortgage insurance with mortgage life insurance, which pays off the mortgage if the borrower dies. While the lender doesn’t want the borrower to die, it is more concerned about the fate of the loan. Historically, when a borrower
has gone to foreclosure and the house has been sold, the lender received only about 80% of the value of the property. Also, the first years of a mortgage are the years of greatest risk. These facts mean several things to the borrower:

1. The less cash you put down, the more expensive the mortgage insurance.
2. If the type of loan is a higher risk, such as an ARM or any loan with increasing payments, the mortgage insurance is more expensive. Mortgage insurance protects the lender against loss if there is a default and foreclosure on the mortgage. Normally mortgage insurance covers the top 25% of the loan, thereby reducing the lender’s exposure to 75% of the value. For example, consider a $100,000 purchase made with 5% Mortgage Insurance 71 down. That creates a very high risk for the lender. In a foreclosure situation it could lose $15,000 or more. The company is not interested in making a high LTV loan without some protection, so it requires that the borrower purchase mortgage insurance to lower the risk.


There are about eight to ten mortgage insurance companies that lenders use. Most lenders have companies that they prefer to deal with because they have developed a good working relationship.

Most of these companies’ rates fall within a close competitive range, but they can change periodically. Before submitting the loan to the underwriter for approval, the lender will choose the mortgage insurance company that it feels will give the best service. The borrower is not involved in this part of the process other than to pay the premium.

Today, most mortgage insurance is “delegated.” That means the lender is delegated by the mortgage insurance company to approve the loan for them. Sometimes the mortgage insurance company’s underwriters will be required to approve the loan. If the loan is computer-approved with MI, the computer will assign the level of coverage, possibly lowering the cost to the borrower.

The MI company used is often determined by its relationship with the lender. A lender may work with three to five companies, rotating the loans given to them based on these relationships. Mortgage insurance companies can help lenders get lower interest, more investors, or just plain lower the cost per loan. Depending on the agreement between the lender and the MI company, a certain percentage of the lender’s loans requiring MI will be assigned to that company. So, mortgage insurance companies can do more than just provide risk coverage.