Mortgage insurance enables a borrower to qualify for mortgage financing with a down payment as low as 3 percent, while protecting the lender, government and taxpayers against the higher risk of default associated with lower down payment loans.
Borrowers who are not able to put 20 percent down when purchasing a home are viewed by lenders as a higher credit risk. Private mortgage insurance (MI) enables these borrowers to qualify for a conventional loan by insuring the lender against potential losses in the event a borrower is not able to repay the loan and there is not sufficient equity in the home to cover the amount owed. Read more about low downpayment facts
Private MI has helped more than 37 million low down payment households purchase a home or refinance an existing mortgage by enhancing their ability to obtain a mortgage in an affordable way. Private MI is backed by private capital, not taxpayers, thus reducing government exposure to mortgage risk.
There have been many regulatory and industry-led reforms over the last decade to improve and strengthen the role of private MI in the nation’s housing finance system. USMI’s report, “Private Mortgage Insurance: Stronger and More Resilient,” analyzes the various regulatory enhancements and industry-led initiatives that private mortgage insurers have taken and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during times of economic distress. The enhancements to the industry include:
Download the full report here
The Private Mortgage Insurer Eligibility Requirements are a set of operational and financial standards that private mortgage insurers must meet to be approved to insure loans acquired by the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. PMIERs are an important part of the significant efforts of policymakers and the MI industry to address lessons learned from the 2008 housing downturn. PMIERs created the strong foundation for efforts to further “de-risk” the GSEs through expanded use of private capital with MI. The GSEs’ regulator, the Federal Housing Finance Agency (FHFA), publishes PMIERs, which were last updated in 2020. These robust requirements provide greater confidence to market participants and policymakers and strengthen the role of the private MI industry in the conventional market. Among the requirements: Since 2008, private mortgage insurers implemented new master policies with their lender customers that provide assurances about the consistent handling and payment of MI claims. These new master policies bring greater transparency and clarity to contractual protections for lenders and investors. Additionally, USMI members continue to work closely with the National Association of Insurance Commissioners’ (NAIC) Mortgage Guaranty Insurance Working Group, which provides for capital requirements and regulation at the state level through the Mortgage Guaranty Insurance Model Act and other elements of solvency regulation.
Private mortgage insurers have a long history of consistently offering mortgage insurance even during significant market downturns. This makes MI very different from capital markets structures that have historically been prevalent during boom cycles but are less available during downturns. Today, private mortgage insurers are even more reliable to lenders and the U.S. government thanks to new master policies that provide enhanced contractual certainty on how and when mortgage insurers pay claims. Interested in learning more about mortgage insurance? Read more about the benefits of MI
The traditional target for a home down payment is 20% of the purchase price, but that’s out of reach for many buyers. Mortgage insurance makes it possible to hand over a much smaller down payment and still qualify for a home loan. It protects the lender in case you default on the loan. With a conventional mortgage — a home loan that isn’t federally guaranteed or insured — a lender will require you to pay for private mortgage insurance, or PMI, if you put less than 20% down. With an FHA mortgage, backed by the U.S. Federal Housing Administration, you’ll pay for mortgage insurance regardless of the down payment amount. USDA mortgages, backed by the U.S. Department of Agriculture, and VA mortgages, backed by the U.S. Department of Veterans Affairs, don't require mortgage insurance. But they do have fees to protect lenders in case borrowers default. So you'll still face an extra cost with these home loans in exchange for the low down payment requirement. You bear the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments. Meanwhile, you’re still on the hook for the loan if you can’t pay, and you could lose the home in foreclosure if you fall too far behind. This is different from mortgage life insurance, which pays off the remaining mortgage if the borrower dies, or mortgage disability insurance, which eliminates the mortgage if the borrower becomes disabled. Mortgage insurance works a little differently depending on the type of home loan. Here’s what you need to know for conventional and government-backed mortgages. Many lenders offer conventional mortgages with low down payment requirements — some as low as 3%. A lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%. Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home. » MORE: Calculate your PMI costs FHA loans feature minimum down payments as low as 3.5% and have easier credit qualifications than with conventional loans. Most FHA home loans require an upfront mortgage insurance premium and an annual premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from 0.45% to 1.05% of the average outstanding balance of the loan for that year. You pay the annual mortgage insurance premium, or MIP, in monthly installments for the life of the FHA loan if you put down less than 10%. If you put down over 10%, you pay MIP for 11 years. » MORE: Is an FHA loan right for you? USDA loans are zero-down-payment loans for rural home buyers. Some USDA loans charge two fees: an upfront guarantee fee you pay once and an annual fee you pay every year for the life of the loan. The 2019 upfront guarantee fee is 1% of the loan amount. The annual fee is 0.35% of the average outstanding loan balance for the year, which is divided into monthly installments and included in your mortgage payment. The federal government evaluates the fees each fiscal year and can change them. But your fee amount will not fluctuate; it is fixed when the loan closes. » MORE: Is a USDA loan right for you? VA mortgages require no down payments and feature low interest rates for active, disabled or retired military service members, certain National Guard members and reservists, and eligible surviving spouses. They don’t require mortgage insurance, but most borrowers will pay a "funding fee" ranging from 1.4% to 3.6% of the loan amount for purchase loans. The fee amount varies based on your down payment amount and whether this is your first VA loan. » MORE: Is a VA loan right for you? But generally you’ll need to get a conventional mortgage and put at least 20% down toward a home to avoid mortgage insurance. » MORE FOR CANADIAN READERS: What is mortgage insurance? |
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